Paper 2 General Insurance Quiz 10

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.

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 third-party liabilities, which are addressed by other types of insurance.

In the context of insurance contracts, a ‘representation’ is a statement of fact made by the proposer to the insurer before the contract is concluded. These statements are crucial for the insurer to assess the risk. The principle of utmost good faith (uberrimae fidei) dictates that all material facts must be disclosed. If a representation is found to be untrue, and it relates to a material fact, it can allow the insurer to avoid the contract. The law generally requires that such representations be substantially true; absolute truth is not always mandated, but a significant deviation from the truth on a material matter can invalidate the policy. Options (b), (c), and (d) present incorrect interpretations of the legal standing of representations. Representations do not necessarily need to be in writing unless specified by law or the proposal form itself. While absolute truth is ideal, ‘substantially true’ is the legal standard for representations to be considered valid. Untrue representations on material facts absolutely affect the contract, making option (d) incorrect.

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 (international and national maritime laws), the large number of parties often involved (e.g., numerous cargo owners), and the lengthy investigation periods typically needed to settle these claims. While Lloyd’s Agents and Loss Adjusters are also involved in claims handling, average adjusters are specifically retained for the unique complexities of GA, and sometimes for complicated hull or cargo losses, distinguishing them from the more general roles of the others.

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 ‘claims-occurring’ policies, where the event causing the claim must have happened during the policy period. Therefore, for an individual director to maintain coverage after leaving a company, they must ensure that any potential claims arising from their tenure are reported to the insurer while the policy is still in force or that appropriate ‘tail coverage’ or ‘extended reporting period’ is secured. The scenario highlights the importance of understanding this policy trigger for continuity of cover.

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 extends beyond the direct physical damage to cover consequential losses like loss of profit and ongoing expenses that continue despite the inability to trade. Options (a), (b), and (c) describe direct physical damage to property or third-party liabilities, which are typically covered by other types of insurance policies (e.g., property damage, public liability) rather than business interruption insurance.

This question tests the understanding of what constitutes a material fact that must be disclosed by an insurance proposer. According to insurance principles, a material fact is one that would influence the judgment of a prudent underwriter in deciding whether to accept the risk and on what terms. Option (a) describes a situation where the insured’s business involves storing highly flammable materials, which significantly increases the fire risk beyond what a typical prudent underwriter would anticipate for that type of business. This directly aligns with the definition of a material fact that could render a risk greater than otherwise supposed. Option (b) describes a fact that improves the risk, which is explicitly excluded from the duty to disclose. Option (c) refers to common knowledge, which also does not need to be disclosed. Option (d) describes a fact that an insurer may be deemed to know, which is another category of information that does not require proactive disclosure by the proposer.

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, irrespective 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 core principle of an indemnity policy is to restore the insured to their pre-loss financial position. When new parts replace old, worn-out parts, the insured is placed in a better position due to the improved condition and lifespan of the new components. This betterment must be accounted for, and the insured is typically required to contribute to the cost of the new parts to reflect this advantage. The scenario highlights that the insurer applied a 35% betterment contribution, which was deemed reasonable given the vehicle’s age and mileage, and the policy’s exclusion of depreciation. This aligns with the principle of indemnity, as it prevents the insured from profiting from the loss by receiving new parts for an old vehicle without contributing to the difference in value.

This question assesses understanding of the ‘fit and proper’ requirement for insurance brokers, a key aspect of their licensing and ongoing supervision under Hong Kong’s regulatory framework. The Insurance Authority (IA) mandates that brokers not only meet minimum financial and professional standards but also demonstrate integrity and good character. This includes having no history of serious financial misconduct, criminal convictions related to business, or any other behavior that would undermine public trust in the insurance industry. Option B is incorrect because while professional indemnity insurance is a minimum requirement, it doesn’t encompass the full scope of ‘fit and proper’ criteria. Option C is incorrect as maintaining proper books and accounts is a procedural requirement, not the overarching ethical and character assessment. Option D is incorrect because while cooperation with principals is important, it’s a specific aspect of business conduct and not the comprehensive ‘fit and proper’ evaluation.

The “tool of trade” clause in commercial vehicle third-party insurance specifically excludes coverage for damage caused when the vehicle is used as a tool of trade, such as a mechanical digger performing its digging function. This exclusion is in place unless statutory provisions mandate otherwise, as is the case with compulsory third-party insurance requirements. Therefore, a mechanical digger being used for excavation would fall under this exclusion, meaning the insurer would not cover damage arising from its use in this capacity, beyond the compulsory third-party liability.

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 in accidents that arise out of and in the course of their employment, regardless of whether the employer was at fault. The ordinance mandates insurance to cover these liabilities. Therefore, the core principle of this compulsory insurance is to provide compensation based on the occurrence of a work-related accident, not on proving employer negligence.

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 indoors or outdoors. Therefore, ice-skating, even indoors, falls under this category. 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. This aligns with the understanding that insurers often interpret exclusions broadly to limit their liability, and such interpretations are upheld if they are reasonable and consistent with the general understanding of the term.

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. Without this evidence, the insurer may deny the claim. Options B, C, and D describe other insurance concepts or conditions that are not directly related to the specific requirement for a theft claim under this policy wording.

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 is valued at HK$500,000, but only insured for HK$300,000. The loss is HK$100,000. Applying the average clause, the payout would be (HK$300,000 / HK$500,000) * HK$100,000 = HK$60,000. Therefore, the insured would receive HK$60,000, and the remaining HK$40,000 of the loss would not be recoverable due to under-insurance.

This question tests the understanding of what constitutes a material fact that must be disclosed by an insurance proposer. According to the principles of utmost good faith, a proposer must disclose all facts that would influence a prudent underwriter’s decision to accept the risk or the terms offered. Option (a) correctly identifies that storing highly flammable materials, which increases the fire risk beyond what would be normally expected for a general store, is a material fact. Option (b) describes a fact that improves the risk, which is explicitly excluded from the duty of disclosure. Option (c) refers to facts that an insurer is presumed to know, such as common risks in a region, which also do not need to be disclosed. Option (d) describes a fact that the proposer cannot reasonably be expected to know, which is also an exception to the disclosure rule. Therefore, the presence of highly flammable materials significantly alters the risk profile and must be disclosed.

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 the rights and interests of customers, ensuring fair treatment and transparency. It also mandates responsible underwriting and claims handling processes to maintain the integrity of the insurance system. Furthermore, it emphasizes the importance of the industry’s reputation and its role as a responsible corporate citizen, which encompasses its public image. Therefore, all four aspects listed – underwriting and claims, customers’ rights and obligations, customers’ rights and interests generally, and the industry’s public image as a good corporate citizen – are within the purview of the Code of Conduct for Insurers.

The scenario describes a situation where an insured person sustained an injury and received a certain number of days of benefit. The core of the dispute lies in the classification of the disability. The Complaints Panel determined that for the latter part of the sick leave period, the insured’s condition met the definition of Temporary Partial Disability, not Temporary Total Disability, as per the policy terms. This distinction is crucial because personal accident policies typically offer different benefit amounts for these two categories. The insurer’s offer, which differentiated between the two types of temporary disablement, was deemed appropriate by the panel based on the nature and severity of the injury and the insured’s ability to perform some duties. Therefore, the insurer correctly applied the policy’s benefit structure by paying for eight days of temporary total disability and five days of temporary partial disability.

The scenario describes a situation where the insured experienced a loss (damaged watch) and took action to mitigate it by sending it for repair. However, the claim was lodged two weeks after the repair was completed. The provided text emphasizes the importance of timely notification to the insurer as per policy conditions. While the insured acted promptly to get the watch repaired, the delay in notifying the insurer about the claim itself, after the repair was done, could be a breach of the ‘as soon as possible’ notification clause. This delay, even if the loss itself is covered, might affect the insurer’s ability to investigate the claim properly or assess the damage before repairs were finalized. Therefore, the insurer might have grounds to question the claim’s validity due to the delayed notification of the claim itself, not the initial damage.

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 rogue wave, provided it’s not an excluded peril. Clause (B) would likely cover this if the rogue wave was considered a peril of the sea, but it’s less certain than (A). Clause (C) would only cover it if a rogue wave was explicitly listed as a covered peril, which is highly unlikely. The question tests the understanding of the hierarchical coverage levels of the Institute Cargo Clauses.

The scenario describes a situation where the insured experienced a loss (damaged watch) and took action to mitigate it by sending it for repair. However, the claim was lodged two weeks after the repair was completed. The provided text emphasizes the importance of timely notification to the insurer as per policy conditions. While the insured acted promptly to get the watch repaired, the delay in notifying the insurer about the claim itself, after the repair was done, could be a breach of the ‘as soon as possible’ notification clause. This delay, even if the repair was immediate, means the insurer was not informed of the potential claim in a timely manner, which is a crucial aspect of claims handling under insurance contracts. Therefore, the insurer might have grounds to question the claim’s validity due to the delayed notification.

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, even if not explicitly asked. Therefore, facts that impact an underwriter’s assessment of insurability or the terms of the policy are considered material.

This question tests the understanding of the legal implications of policy renewals in Hong Kong. Statement (i) is correct because the duty of utmost good faith, which is fundamental to insurance contracts, is a continuous obligation and is particularly relevant at renewal when new information may need to be disclosed. Statement (ii) is also correct; a renewal is generally considered the creation of a new contract, even if the terms are similar to the previous one, as it establishes a new period of coverage. Statement (iv) is true as 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 incorrect because while terms can be negotiated, they are not entirely ‘freely’ negotiable in the sense that the insurer may have standard renewal terms and conditions, and the insured’s risk profile at renewal will influence the terms offered. Therefore, the combination of (i), (ii), and (iv) accurately reflects the principles of general insurance policy renewals.

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 (b) is incorrect because while exclusions exist, the fundamental principle is broad coverage. Option (c) is incorrect as ‘all risks’ does not imply coverage for intentional acts by the insured. Option (d) is incorrect because the insurer’s responsibility to prove an exclusion is a key characteristic, not a limitation.

The question tests the understanding of the legal significance of a certificate of compulsory insurance, particularly in motor insurance. Section 2.2.4 (iv) of the provided text explicitly states that these certificates are issued solely because the law requires them and that failure to issue one is a criminal offense. It further emphasizes the legal importance of the certificate, making it essential for the insurer to recover it upon policy cancellation. Therefore, the primary purpose and legal mandate for issuing such a certificate is to fulfill a statutory requirement, not to detail the specific terms of coverage like ‘Comprehensive’ or ‘Act Only’, which are found in the policy document itself.

This question tests the understanding of ‘System of Check’ in fidelity guarantee insurance. A robust system of check is crucial for employers to maintain internal discipline and control over their employees who are entrusted with financial responsibilities. This involves implementing procedures and controls to prevent or detect fraudulent activities. Option A correctly identifies the core purpose of such a system in this context. Option B is incorrect because while insurance policies do have terms and conditions, the ‘system of check’ specifically refers to the employer’s internal controls, not the insurer’s policy wording in isolation. Option C is incorrect as the primary focus is on preventing losses due to employee dishonesty, not necessarily on the insurer’s underwriting profit margins. Option D is incorrect because while audits are a component of internal control, the ‘system of check’ is a broader concept encompassing various preventative and detective measures.

This question tests the understanding of the Insurance Claims Complaints Bureau (ICCB) in Hong Kong, a key dispute resolution mechanism for insurance policyholders. The ICCB scheme is designed to provide an accessible and cost-effective avenue for resolving disputes between policyholders and insurers. It is crucial to understand the scope of its applicability, the nature of its services, and the limitations on its awards. Specifically, the ICCB scheme covers both general and long-term insurance claims, not just personal insurance. The service is free for complainants, aligning with its objective of accessibility. While the ICCB makes recommendations, its awards are not legally binding on the insurer in the same way a court judgment would be, and the complainant can choose to accept or reject the award. Furthermore, there is a monetary limit to the claims that can be handled by the ICCB, which is periodically reviewed and updated by the industry. Therefore, understanding these specific operational parameters is vital for anyone dealing with insurance claims in Hong Kong.

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 without a causal link or fraud would not typically be grounds for claim refusal under this undertaking.

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 weather or vandalism, 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 the *extent* of the damage. Option C is incorrect as admitting liability to a third party without the insurer’s consent can prejudice the insurer’s rights. Option D is incorrect because while cooperation is required, the primary focus of the insured’s immediate actions post-loss, in terms of their own duties, is to prevent exacerbation of the damage.

The scenario describes a situation where an insured person’s ability to perform their usual occupation is partially restored, but not fully. The insurer’s decision to classify the latter part of the recovery period as Temporary Partial Disablement (TPD) is based on the medical assessment that the insured’s range of trunk movement had improved significantly, allowing them to perform some duties. This aligns with the policy’s provision for different benefit amounts for Temporary Total Disablement (TTD) and TPD, where TPD applies when an insured can perform some, but not all, of their usual work. The Complaints Panel’s decision to favour the attending doctors’ opinion over the insurer’s medical consultant highlights the importance of the treating physician’s assessment in determining the extent of disability, especially when there are conflicting medical views. The key distinction lies in the insured’s capacity to engage in their occupation, even if limited.