Paper 2 General Insurance Quiz 08

The Employees’ Compensation Ordinance in Hong Kong establishes a strict liability for employers regarding injuries or death sustained by employees that arise out of and in the course of their employment. This means that the employer’s fault or negligence is not a prerequisite for compensation. The ordinance mandates insurance to cover these liabilities. While the scenario describes an accident happening outside of typical working hours, the crucial factor for coverage under the EC policy is whether the accident can be demonstrably linked to the employment, even if indirectly. The taxi journey home after a client meeting could potentially be considered part of the employment duties or a consequence thereof, making the employer’s liability a relevant consideration. Therefore, the EC policy is designed to cover such statutory liabilities, irrespective of the employer’s direct fault.

A cover note is a binding document that provides immediate, albeit temporary, insurance coverage. It serves as documentary evidence that insurance exists, even before the formal policy is issued. While it can have cancellation clauses, its primary function is to confirm coverage from the outset, making it distinct from a policy which is the final, comprehensive contract, or a certificate of insurance which primarily serves as proof of compulsory insurance or a summary of cover under a master policy.

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’ and ‘while being conveyed by messenger’. The loss occurred outside business hours, and while the cash was being conveyed, the timing violated a key condition of the policy. Therefore, the claim would be rejected because the loss did not occur within the specified business hours, which is a critical limitation of this type of policy as outlined in the syllabus regarding ‘Limitations and exclusions’ for money insurance, specifically concerning the timing of the loss.

The question tests the understanding of the definition of ‘theft’ under a typical theft insurance policy, specifically the requirement for forcible and violent entry or exit. Option (a) correctly identifies that the policy requires evidence of forced entry or exit to cover the loss. Option (b) is incorrect because while damage to premises during entry/exit is covered, the primary condition for theft coverage is the forcible entry/exit itself, not just any damage. Option (c) is incorrect as theft by staff is explicitly excluded and falls under fidelity guarantee. Option (d) is incorrect because fire damage, even if related to a theft, is excluded from a theft policy and would typically be covered under a fire insurance policy.

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 principle itself. Similarly, adherence to codes of conduct is a manifestation of being fit and proper, but not the core requirement.

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.

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.

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 clients that are not part of the standard policy terms or published commission structures. This practice is seen as undermining fair competition and the integrity of the insurance pricing mechanism. The Code of Practice for the Administration of Insurance Agents, along with the minimum requirements of the Model Agency Agreement, explicitly prohibits offering commission or other benefits to employees of the insured without the insured’s prior written consent. This is to prevent situations where such benefits could influence purchasing decisions or be perceived as a form of bribery or corruption, thereby compromising the principle of honest reward for intermediaries and potentially distorting the market. Therefore, offering a portion of the commission to an employee of a corporate client without the client’s explicit written approval directly contravenes these regulations.

This question tests the understanding of exclusions in engineering insurance, specifically Boiler Explosion Insurance. The provided text states that risks normally insurable by other policies, such as fire and extra perils, are excluded from Boiler Explosion Insurance. This is to prevent duplication of coverage and ensure that each policy covers distinct risks. Therefore, a fire that occurs during a boiler explosion would typically be covered by a separate fire insurance policy, not the boiler explosion policy.

This question tests the understanding of how an excess works in motor insurance. A voluntary excess is an amount the policyholder agrees to bear for each claim, in exchange for a reduction in the premium. If the policyholder chooses a voluntary excess of HK$5,000 and the repair cost is HK$15,000, the insurer will pay the amount exceeding the voluntary excess, which is HK$10,000 (HK$15,000 – HK$5,000). The remaining HK$5,000 is the policyholder’s responsibility. This demonstrates the principle of risk sharing between the insurer and the insured.

The Employees’ Compensation Assistance Scheme (ECAS) is designed to provide a safety net when an employer’s compulsory employees’ compensation insurance is absent or ineffective. It is funded partly by a levy on insurance premiums. Therefore, if an employer fails to secure the mandatory insurance, the ECAS steps in to ensure employees receive compensation for work-related injuries or diseases, fulfilling the spirit of the Employees’ Compensation Ordinance.

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 covering an incident that occurred during the policy year, even if the claim is filed later, aligns with the “claims-occurring” principle.

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, to a degree that a prudent underwriter would not typically anticipate for a general business. According to the principles of utmost good faith and the duty of disclosure, a proposer must reveal facts that materially affect the risk. Storing highly flammable materials falls under this category as it ‘render[s] a risk greater than would otherwise be supposed,’ as outlined in the syllabus. Failing to disclose such a fact would be a breach of the proposer’s duty, potentially allowing the insurer to void the policy or adjust terms.

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 types of insurance or policy features that are not directly relevant to the timing of claim reporting in this specific context.

A combined liability policy is designed to consolidate various liability coverages into a single document for convenience and potential premium savings. While it typically includes Public Liability, Products Liability, and Employees’ Compensation Liability, clients may also opt for additional coverages like Directors’ and Officers’ Liability or Professional Liability. The key characteristic is the integration of these distinct liability risks under one policy document. Option B describes a combined ‘Umbrella’ type cover, which is broader and can encompass property, pecuniary, and liability risks, often individually designed and not necessarily limited to the core liability types mentioned. Option C refers to property insurance, which covers physical assets, and pecuniary insurance, which covers financial interests, distinct from liability coverages. Option D describes a traditional fire policy, which is a form of property insurance and does not encompass liability risks.

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, by definition, are always in parallel with other 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 compulsory underwriting excess, which is HK$7,000. The explanation that the standard policy excess would be added to the voluntary excess is incorrect because the HK$2,000 is an underwriting excess, not a standard policy excess. The explanation that the voluntary excess replaces the compulsory excess is incorrect as they are additive. The explanation that only the voluntary excess applies is incorrect as compulsory excesses are also binding.

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.

This question tests the understanding of the ‘System of Check’ in fidelity guarantee insurance, which is crucial for internal discipline and control within an employer’s operations. The system of check involves implementing robust internal controls and procedures to prevent or detect fraudulent activities by employees. Option A correctly identifies this as the primary purpose of such a system. Option B is incorrect because while audits are part of internal control, the ‘system of check’ is broader than just periodic audits. Option C is incorrect as it focuses on external regulatory compliance rather than the employer’s internal mechanisms. Option D is incorrect because while employee training is important, it’s a component of a broader system of check, not the entirety of it.

This question tests the understanding of the distinction between ‘Specified Perils’ and ‘All Risks’ cover in property insurance. ‘Specified Perils’ cover only losses caused by events explicitly listed in the policy, meaning the claimant must prove the loss was due to one of these named perils. ‘All Risks’ cover, conversely, covers all accidental losses unless specifically excluded, shifting the burden of proof to the insurer to demonstrate an exclusion applies. The scenario describes a situation where a loss occurred, and the claimant needs to prove the cause was a specific event mentioned in their policy, which aligns with the definition of ‘Specified Perils’ cover.

This question tests the understanding of the legal implications of insurance policy renewals in Hong Kong. Statement (i) is true because the duty of utmost good faith is a continuous obligation that applies at all stages of the insurance contract, including renewal, where new information may need to be disclosed. Statement (ii) is also true as a renewal is generally considered the creation of a new contract, rather than a mere continuation of the old one, meaning the terms and conditions can be re-evaluated. Statement (iv) is correct because insurers have a duty to inform policyholders if they do not intend to renew a policy, allowing the insured to seek alternative coverage. Statement (iii) is false because while terms can be negotiated, they are not ‘freely’ negotiable in the sense that the insurer can unilaterally change terms without proper notification or justification, and the insured has the right to accept or reject the renewal terms. The renewal process is governed by principles of good faith and regulatory requirements.

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 a form of compensation, they relate to saving property from peril, not necessarily a sacrifice made by one party for the benefit of all in the common adventure. Option C is incorrect as sue and labour charges are expenses incurred by the assured to preserve insured property from an insured loss, not a contribution from others due to a GA act. Option D is incorrect because while a total loss of a portion of the cargo might occur, the core concept being tested is the entitlement to a GA contribution from the saved parties.

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) assesses whether an applicant or existing broker meets this standard based on various factors, including integrity, financial soundness, and competence. Option (b) is incorrect because while capital and net assets are important minimum requirements, they are distinct from the broader ‘fit and proper’ assessment. Option (c) is incorrect as professional indemnity insurance is a specific requirement, not the overarching criterion for being fit and proper. Option (d) is incorrect because while maintaining proper books and accounts is part of good conduct, it is a component of the ‘fit and proper’ assessment rather than the entirety of it. The IA’s assessment is holistic, encompassing ethical behavior, financial stability, and operational integrity.

A Scheduled Policy Form is a common structure where the policy details, such as the insured’s name, the property covered, the sum insured, and the premium, are listed in a schedule attached to the policy document. This schedule forms an integral part of the contract. The Signature Clause, also known as the Attestation Clause, is a specific section within this scheduled policy form where the insurer formally signifies their agreement and commitment to the terms outlined in the policy. It is the insurer’s formal confirmation of their undertaking.

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 the policy’s basis to ensure continuous protection after employment termination.

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.

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.

This question tests the understanding of how contract terms are classified based on their timing of operation within an insurance contract. 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 policy requiring the insured to report changes in their profession. Failure to do so, while not invalidating the policy itself, would directly impact the insurer’s obligation to pay a claim arising from a situation related to that un-notified profession. This aligns with the definition of a condition precedent to liability, as it affects the insurer’s duty to indemnify for a particular event or loss, rather than the contract’s existence from the outset or its continuation after a fundamental breach.

The scenario describes a situation where an insurer rejected a hospitalization claim based on a pre-existing condition. The insured had consulted for rectal bleeding 15 months before applying for insurance, and the insurer believed the colon tumour could not have developed within 10 days of policy inception. The Complaints Panel, considering the tumour’s size, agreed that it likely took time to grow, and since the policy excluded illnesses presenting signs or symptoms prior to its commencement, the insurer’s decision was upheld. This aligns with the principle that insurance policies typically exclude coverage for conditions that were already present or showing symptoms before the policy’s effective date, even if not formally diagnosed. The difficulty in ascertaining the exact onset date of a condition is a common challenge in applying pre-existing condition clauses, as highlighted in the provided text.

An insurance broker acts as an agent for the proposer, meaning they are legally identified with the proposer. This agency relationship imposes a duty of utmost good faith. If a broker withholds or misrepresents material facts, this breach of good faith is imputed to the proposer. This can lead to the insurer voiding the contract, as the broker’s actions are considered the proposer’s actions in the eyes of the law. Therefore, the broker’s failure to disclose material information is a direct breach of the proposer’s duty to the insurer.

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 part of the insurance contract itself. This practice is seen as undermining fair competition and the integrity of premium calculations. The Code of Practice for the Administration of Insurance Agents, along with provisions in the Model Agency Agreement, explicitly prohibits offering commissions or other financial advantages to employees of the insured without the insured’s written consent. This is to prevent situations where such benefits could influence purchasing decisions or be perceived as a form of bribery or corruption, thereby distorting the true cost and value of the insurance product. Therefore, offering a portion of the commission to an employee of a corporate client without the client’s explicit written permission is a direct contravention of these regulations.