Paper 2 General Insurance Quiz 11

The scenario describes a situation where a valuable antique vase is insured on an agreed value basis. This means that in the event of a total loss, the insurer will pay the agreed sum insured, irrespective of the vase’s actual market value at the time of the loss. However, for partial losses, the principle of strict indemnity applies, meaning the payout will be based on the actual loss incurred, not the agreed value. This is a key characteristic of agreed value policies for high-value, unique items where market value can fluctuate significantly or be difficult to ascertain.

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. Option B is incorrect because while audits are part of a control system, the ‘system of check’ is broader and encompasses ongoing internal controls, not just periodic audits. Option C is incorrect as the primary focus is on preventing and detecting fraud by employees, not on external risks or general business operations. Option D is incorrect because while insurance is a risk transfer mechanism, the ‘system of check’ refers to the employer’s internal measures to mitigate the risk of employee dishonesty, which is a prerequisite for obtaining fidelity guarantee insurance.

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 Motor Vehicles Insurance (Third Party Risks) Ordinance mandates compulsory third-party motor insurance in Hong Kong. This ordinance ensures that victims of motor accidents are protected by requiring all vehicle owners to have a minimum level of insurance coverage for third-party bodily injury and property damage. 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, acting as a safety net for victims.

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 or total functional disablement as defined in the policy, would not qualify for the ‘loss of one limb’ benefit. The policy’s definition is crucial, and without specific provisions for partial permanent disability, such claims are typically rejected. Therefore, the insurer’s rejection of the claim for partial disablement of the hand, despite functional loss, is consistent with the policy’s strict definition.

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 representations 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 render the contract voidable by the insurer. 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 always need to be in writing unless specified by law or the proposal form itself. While absolute truth is ideal, the legal standard for representations is typically substantial truth. Untrue representations on material facts absolutely can affect the contract, making option (d) incorrect.

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 it *is* permanently marked, it would be covered. Therefore, a scenario where the ship’s boat is properly marked would lead to a claim being accepted for damage to it, assuming the damage is caused by a covered peril.

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 void the policy from the date of the breach. However, insurers in Hong Kong have voluntarily agreed, through the Hong Kong Federation of Insurers’ Code of Conduct, to only deny a claim due to a warranty breach if there is a causal link between the breach and the loss, or if the breach was fraudulent. This means that a breach without a causal connection or fraud would not typically lead to a claim denial under this undertaking, even though technically the policy liability might be discharged.

The ‘step-back system’ for No Claim Discount (NCD) in private car insurance, as outlined in the IIQE syllabus, dictates how a claim affects the accumulated discount. For a private car with an entitlement of four or more years (equivalent to 50% or 60% NCD), a single claim in the policy year will result in a reduction of the renewal discount to 20% or 30% respectively. This means the discount does not reset to zero but is significantly reduced, requiring subsequent claim-free years to rebuild to the previous level. Options B, C, and D describe scenarios that are either incorrect (no impact or full loss of NCD) or apply to different vehicle types or claim frequencies.

This question tests the understanding of the legal implications of renewing an insurance policy 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. Statement (ii) is also true as a renewal is generally considered the creation of a new contract, not merely a continuation of the old one, meaning new terms and conditions can apply. 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 entirely ‘freely’ negotiable as they must still align with the insurer’s underwriting guidelines and regulatory requirements. Therefore, statements (i), (ii), and (iv) are the accurate assertions regarding general insurance policy renewals.

The provided text states that Personal Accident (PA) policies in Hong Kong are typically ‘Accidents Only’ policies. This means they are designed to cover benefits arising from accidental events, such as injury or death due to an accident. Sickness benefits, particularly for temporary disablement, might be included, but death from sickness is explicitly excluded as it falls under life insurance. Therefore, a policy that covers death from sickness would not be classified as a standard PA policy in the Hong Kong context described.

The principle of indemnity in insurance aims to restore the insured to the financial position they were in before the loss. When a vehicle is repaired with new parts, and the original parts were aged, the insured is considered to be in a better position (betterment) due to the improved condition of the new parts. Therefore, the insurer is entitled to deduct a portion of the repair cost to account for this betterment. The case highlights that the insurer’s calculation of a 35% betterment contribution for an eight-year-old vehicle, compared to a standard 50% depreciation rate, was deemed reasonable by the Complaints Panel. This aligns with the indemnity principle, as the policy specifically excluded depreciation, making the betterment contribution a mechanism to prevent the insured from profiting from the claim.

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 considering post-employment coverage continuity, which is a direct consequence of the claims-made nature of D&O insurance.

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 a stipulated timeframe. Unlike insurance, which typically covers unforeseen events, a performance bond is a financial guarantee against non-performance or default by the contractor. The bond ensures that if the contractor fails to complete the project as agreed, the surety company will step in to cover the costs of completion, either by finding another contractor or by compensating the obligee (the party receiving the bond). This aligns with the definition provided, emphasizing its role as a guarantee for project completion within a set period.

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 is a component of the overall system, not the system itself.

A cover note is a temporary document that provides immediate evidence of insurance coverage, binding the insurer even before the formal policy is issued. It is often used in motor insurance to facilitate vehicle registration and serves as proof of legally required insurance. While it offers unconditional cover, it typically includes cancellation provisions and is intended for a short duration, to be replaced by a formal policy. The question tests the understanding of the primary function and nature of a cover note as a binding, temporary document providing immediate evidence 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 proof to demonstrate that an exclusion applies. Option (b) is incorrect because while exclusions exist, the fundamental principle is broad coverage. Option (c) misrepresents the burden of proof, suggesting the insured must prove coverage. Option (d) is incorrect as ‘all risks’ does not imply coverage for every conceivable event, but rather a wide scope subject to defined exclusions.

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 basis of cover for personal protection after employment termination.

The Employees’ Compensation Ordinance in Hong Kong establishes a strict liability for employers regarding employee injuries or death arising out of and in the course of employment. This means the employer is liable regardless of fault. The scenario describes an employee injured in a traffic accident while commuting home after a client meeting. For the injury to be covered under the EC policy, it must be demonstrably linked to the employment. While the meeting was work-related, the accident occurred during the commute home, which is generally considered outside the direct scope of employment unless specific circumstances, such as the employer providing transport or the commute being an integral part of the job duties, are present. Therefore, the key factor is whether the accident can be proven to have arisen out of and in the course of employment, which is not automatically assumed in a post-work commute.

A cover note serves as a temporary insurance document that binds the insurer, providing immediate evidence of coverage. Unlike a policy, which is the final document representing the completed underwriting process, a cover note is issued before all inquiries are finalized. Its primary function is to offer immediate proof of insurance, often used in situations like motor vehicle registration or when a lender requires evidence of coverage before approving a loan. While it provides unconditional cover, it typically has cancellation provisions and is intended for a short duration, to be replaced by a formal policy.

The Employees’ Compensation Ordinance in Hong Kong establishes a strict liability for employers regarding employee injuries or death arising out of and in the course of employment. This means the employer is liable regardless of fault. The scenario describes an employee injured in a traffic accident while commuting home after a client meeting. The key phrase here is ‘arising out of and in the course of their employment.’ While the meeting was work-related, the accident occurred during her commute home, which is generally considered outside the direct scope of employment unless specific circumstances, like the employer providing transport or the commute itself being an integral part of the job, are present. Therefore, the employer’s liability under the Ordinance would likely not be triggered in this instance, as the accident did not occur ‘in the course of employment’ in the typical interpretation.

Moral hazard refers to the increased likelihood of a loss occurring because an individual is insured. It encompasses the ‘human element’ of risk, including attitudes and behaviours. Dishonesty, carelessness, unreasonableness, and negative social behaviour are all manifestations of moral hazard. While dishonesty can lead to fraud, carelessness can result in accidental losses. Unreasonableness, even in an honest individual, can create significant problems due to inflexibility or strong opinions. Social behaviour, such as vandalism, also contributes to the risk profile. Therefore, a comprehensive understanding of moral hazard requires considering these behavioural aspects beyond mere financial dishonesty.

The scenario describes a situation where an insured individual, after a period of total disablement, shows a significant improvement in their physical condition, allowing them to perform some, but not all, of their usual work duties. This aligns with the definition of temporary partial disablement, where the insured is capable of performing some work but not their full occupation. The insurer’s decision to transition the benefit from temporary total to temporary partial disablement is justified by the medical assessment indicating a partial recovery of function, enabling the insured to undertake certain aspects of their role. The Complaints Panel’s decision in Case 2, which favored the insured’s attending doctors’ opinion on the inability to perform *any* work, highlights the importance of the specific wording in the policy and the medical evidence presented. However, in this scenario, the medical examiner’s report suggests a partial capacity for work, making temporary partial disablement the appropriate classification.

This question tests the understanding of the distinction between ‘Specified Perils’ and ‘All Risks’ cover in property insurance, as outlined in the IIQE syllabus. ‘Specified Perils’ cover only losses caused by events explicitly listed in the policy, requiring the claimant to prove the cause of loss. ‘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 is unable to identify the exact cause. Under a ‘Specified Perils’ policy, this would likely result in a denied claim because the claimant cannot prove the loss was due to a named peril. However, under an ‘All Risks’ policy, the claimant only needs to prove an accidental loss occurred, and the insurer would then need to prove an exclusion applies. Therefore, the ‘All Risks’ policy is more advantageous in this specific situation.

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. Without this signature, the insurer’s commitment to the policy would not be legally established.

The scenario describes a situation where an insurance agent offers a portion of their commission back to a corporate client’s employee as an incentive to secure a general insurance policy. This practice is explicitly prohibited under the Code of Practice for the Administration of Insurance Agents and the minimum requirements of the Model Agency Agreement. Rebating, in this context, is considered unethical and potentially illegal as it distorts the true cost of insurance, undermines fair competition, and can be construed as a form of bribery or corruption. The prohibition is in place to ensure that commissions reflect the actual services provided by the intermediary and to maintain the integrity of the insurance market. The key elements are the offering of a commission rebate to an employee of the insured without the insured’s explicit written consent, which directly contravenes regulatory guidelines designed to prevent such practices.

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. Therefore, the statement that an insurer does not have to remind the insured about renewal is accurate.

A Certificate of Insurance serves as formal confirmation of the existence of compulsory insurance, particularly in motor and pleasure vessel 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 payment from the insurer. Its primary function is to satisfy legal requirements for proof of insurance.

This question tests the understanding of how travel insurance premiums are determined. While geographical area, duration, and the number of people insured are primary factors, the concept of an ‘annual policy’ is a specific pricing structure designed for frequent travelers. This structure offers a single premium for a defined period, typically a year, covering multiple trips. The other options represent individual trip factors or general policy features, not the specific pricing model for frequent travelers.

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.