Paper 2 General Insurance Quiz 14

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 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 attacked, thus removing the ‘accidental’ nature of the injury as required by personal accident policies.

The Insurance Claims Complaints Bureau (ICCB) is designed to handle disputes related to personal insurance claims. It has a jurisdictional limit of HK$800,000 for the value of the claim. Complaints exceeding this amount, or those arising from commercial, industrial, or third-party insurance, fall outside the ICCB’s purview and must be resolved through other means such as litigation or arbitration. Therefore, a dispute involving a commercial property insurance claim, regardless of its monetary value, would not be handled by the ICCB.

This question tests the understanding of how changes in the insured risk can affect the insurance contract. The Insurance Companies Ordinance (Cap. 41) and related common law principles dictate that if the circumstances under which the 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 insurer’s assessment of the risk, and therefore the premium charged, was based on the original, more favorable circumstances. A change for the worse increases the likelihood or severity of a claim, potentially rendering the original terms inadequate. Options B, C, and D describe situations that are generally not grounds for cancellation based on a change in risk for the worse; a decrease in risk might lead to premium adjustments but not cancellation, and a change in the insurer’s internal policies or market conditions, while impacting business, doesn’t automatically grant cancellation rights based on a deterioration of the insured’s risk profile.

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 a sacrifice is made, such as jettisoning cargo, the owner of the sacrificed goods is entitled to a contribution from other parties whose property was saved. This contribution is known as a General Average Contribution. The scenario describes a situation where a portion of the cargo was intentionally discarded to prevent the entire vessel and its remaining cargo from sinking. This act of jettisoning cargo is a classic example of a GA sacrifice. The owner of the jettisoned goods would then have a claim for a GA contribution from the owners of the saved cargo and the vessel, provided the GA act successfully averted a greater loss for all parties involved.

A General Average Act is defined as any extraordinary sacrifice or expenditure voluntarily and reasonably made or incurred in time of peril for the purpose of preserving the property imperilled in the common adventure. In this scenario, the decision to jettison a portion of the cargo to lighten the vessel and prevent it from sinking during a storm is a classic example of an extraordinary sacrifice made voluntarily and reasonably in a time of peril to save the entire marine adventure. Therefore, this action constitutes a General Average Act, and the loss incurred by the owner of the jettisoned cargo is a General Average Loss.

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. Option B is incorrect because while the BI policy covers loss of profit and additional expenses, it is contingent on material damage. Option C is incorrect as the BI policy is not a standalone cover for all business disruptions, but specifically linked to insured perils causing material damage. Option D is incorrect because the ‘time factor’ is a loading for premium calculation, not a condition for claim admissibility.

This question assesses the understanding of the multifaceted impact of poor customer service on an insurance company’s operations and reputation. A “take it or leave it” attitude, as described in the syllabus, directly leads to a loss of business due to customer awareness of their rights and expectations for courteous service. Furthermore, it erodes the confidence of insurance intermediaries, who rely on quality service from their principals to effectively generate business. This lack of support from intermediaries, coupled with a negative public perception, can significantly damage the company’s market standing and potentially attract regulatory scrutiny, as governments aim to protect consumers and maintain the reputation of Hong Kong as a financial hub. Therefore, all these outcomes are direct consequences of neglecting customer service.

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 ‘perils of the sea’ were explicitly listed and the rogue wave qualified. Since the question asks for the clause that covers ‘all risks’ unless excluded, Clause (A) is the most appropriate answer.

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 unauthorized transactions. This directly aligns with the core purpose of fidelity guarantee insurance, which is to cover losses arising from employee fraud or dishonesty. Options B, C, and D describe different types of insurance or financial instruments that do not directly address losses caused by employee misconduct. Professional indemnity insurance covers negligence, public liability covers third-party injury or damage, and a performance bond guarantees contract completion.

This question tests the understanding of the legal and contractual aspects of insurance policy renewals in Hong Kong. Statement (i) is true because the principle of utmost good faith is a continuous duty throughout the life of an insurance contract, and it is particularly important at renewal when new information may need to be disclosed. Statement (ii) is also true; a renewal is generally considered the creation of a new contract, not merely a continuation of the old one, which means the terms and conditions can be re-evaluated. Statement (iv) is correct as insurers have a duty to inform policyholders if they do not intend to renew a policy, allowing the insured time to seek alternative coverage. Statement (iii) is generally false because while terms can be negotiated, insurers often offer renewals on existing terms or with pre-determined adjustments, and the insured does not have absolute freedom to renegotiate every term without the insurer’s agreement. Therefore, statements (i), (ii), and (iv) are the accurate assertions regarding general insurance policy renewals.

The Employees’ Compensation Ordinance in Hong Kong establishes a strict liability for employers regarding injuries or death sustained by employees arising out of and in the course of their 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. Therefore, the employer’s liability under the EC Ordinance would likely not be triggered for this specific incident, as it did not occur ‘in the course of’ her employment.

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.

This question tests the understanding of how an excess works in motor insurance, specifically in the context of property damage to the insured’s own vehicle. The scenario describes a loss of HK$12,000. An excess of HK$2,000 means the insured is responsible for the first HK$2,000 of the claim. Therefore, the insurer will pay the remaining amount, which is HK$12,000 – HK$2,000 = HK$10,000. The explanation clarifies that the excess is applied to the property damage section of a comprehensive policy and that the insured bears the initial portion of the loss up to the excess amount.

This question tests the understanding of how insurers manage risk through policy endorsements. When an insurer identifies a specific, elevated risk associated with a particular aspect of a policyholder’s situation (like a pre-existing back condition in personal accident insurance or a family member’s poor driving record in motor insurance), they can choose to exclude coverage for that specific risk rather than declining the entire policy. This is achieved through a specially worded exclusion clause, often referred to as an endorsement or rider, which modifies the standard policy terms. This allows the insurer to offer coverage for the general risk while mitigating potential losses from the identified adverse factor. Options B, C, and D describe different concepts: a market exclusion is a standard exclusion applied across many policies in the industry (e.g., war risks), a general exclusion is a broad exclusion applicable to all policyholders, and fraud is a legal principle that invalidates a claim, not a policy modification technique.

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 core principle is that the employer must implement robust internal controls to manage the risks associated with employees entrusted with financial responsibilities. Option A correctly identifies the purpose of such a system as establishing and maintaining effective internal controls to mitigate risks associated with employee dishonesty. Option B is incorrect because while audits are part of a control system, the ‘System of Check’ is broader than just periodic audits; it encompasses ongoing operational controls. Option C is incorrect as the focus is on the employer’s internal controls, not the insurer’s direct supervision of employees. Option D is incorrect because while the insurer assesses the employer’s system, the system itself is the employer’s responsibility to implement and maintain, not a direct contractual obligation to the insurer to prevent all losses.

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 insurer has a legal obligation to recover the certificate if the policy is cancelled, highlighting its crucial role in demonstrating compliance with compulsory insurance requirements. Therefore, the certificate’s primary function is to serve as legal proof of compliance with statutory insurance obligations, rather than to provide a comprehensive summary of the policy’s terms.

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 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 serve as both a standard of declared intentions and a measure of performance, and typically include commitments to quality, professional standards, efficiency, ethical conduct, fair claims handling, and specific business practices. Therefore, a declaration that omits any of these core commitments would be incomplete.

This question tests the understanding of waiver in the context of insurance premium payments. Waiver occurs when an insurer, through its actions or representations, indicates it will not strictly enforce a contractual term, such as the punctuality of premium payments. If an insurer consistently accepts late premium payments without objection, it may be considered to have waived its right to demand strict punctuality for future payments. Estoppel, on the other hand, requires the insured to demonstrate reasonable reliance on the insurer’s conduct or representation, leading to a detrimental change in their position. Option B is incorrect because while the insurer’s past acceptance of late payments is relevant, it’s the *conduct* of not insisting on punctuality that constitutes the waiver, not merely the existence of a policy. Option C is incorrect as estoppel requires reliance by the insured, which is not the primary focus of waiver itself. Option D is incorrect because while policy wording is important, waiver is about the insurer’s conduct overriding or modifying the strict interpretation of those terms in practice.

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.

The concept of ‘Agreed Value’ in insurance, particularly for high-value items like jewelry or antiques, means that the sum insured is fixed and payable in the event of a total loss, irrespective of the item’s actual market value at the time of the loss. This differs from the principle of indemnity, which aims to restore the insured to their pre-loss financial position. For partial losses, however, the principle of strict indemnity typically still applies, meaning the payout would be based on the actual loss incurred, not the agreed value. Therefore, the statement that the agreed value is payable for both total and partial losses is incorrect.

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 only after the repair was completed and the watch was collected, which was two weeks after the incident. 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 potential claim, even after the loss occurred, could be considered a breach of the ‘as soon as possible’ notification requirement. This delay, even if the insured was unaware of the exact claim procedure, could impact the insurer’s ability to investigate the loss effectively. Therefore, the insurer might have grounds to question the validity of the claim due to the delayed notification, as it deviates from the expected prompt reporting of a potential claim event.

A General Average Act is defined as an extraordinary sacrifice or expenditure voluntarily and reasonably made or incurred in a time of peril to preserve the property imperilled in a common maritime adventure. This means that for an act to qualify as General Average, it must be both intentional and prudent, undertaken specifically to avert a common danger threatening the entire voyage. The scenario describes a deliberate decision to jettison cargo to lighten the vessel during a storm, which directly aligns with the definition of a General Average Act. The other options describe different concepts: salvage is the saving of property from peril for a reward, sue and labour charges are expenses to preserve insured property from an insured loss, and actual total loss refers to the complete destruction or irretrievable loss of the subject matter.

Institute Cargo Clauses (ICC) (A) provides the broadest coverage for own damage, operating on an ‘All Risks’ basis. This means it covers all perils except those specifically excluded. ICC (B) and ICC (C) are more restrictive, covering only specified risks. Banks often require ICC (A) for cargo shipments when providing financing or guarantees because its comprehensive nature offers greater protection against unforeseen events. Therefore, when a bank requires a guarantee for a shipment, the insurer would typically issue a policy under ICC (A) to satisfy the bank’s security requirements.

The question probes the understanding of prohibited practices in the insurance intermediary sector, specifically concerning rebating. Rebating, in essence, involves offering inducements to policyholders that are not part of the insurance contract itself. This practice is detrimental because it distorts the true cost of insurance, potentially leading to adverse selection and undermining the principle of fair risk assessment. Furthermore, it can be seen as a form of unfair competition, as it provides an advantage to intermediaries who engage in such practices over those who adhere to ethical standards. The prohibition against rebating is rooted in maintaining the integrity of the insurance market and ensuring that premiums accurately reflect the risk being insured. Offering a portion of the commission to an employee of the insured without the insured’s explicit written consent directly contravenes this principle, as it benefits a third party associated with the policyholder in a manner that is not transparently disclosed or agreed upon by the primary party to the insurance contract. This practice is explicitly addressed and prohibited by regulations such as the Code of Practice for the Administration of Insurance Agents and the minimum requirements of the Model Agency Agreement, which are designed to uphold ethical conduct and prevent practices that could be construed as bribery or corruption.

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. It also explicitly outlines the rights and obligations of customers, ensuring they are informed and treated equitably. Furthermore, the Code emphasizes the importance of safeguarding customers’ overall interests, which encompasses not just their contractual rights but also their well-being and fair treatment throughout their relationship with the insurer. While a good corporate image is desirable, the Code’s primary focus is on the direct conduct of insurance business and customer protection, rather than the broader societal impact of the industry’s public image as a corporate citizen.

The question tests the understanding of exclusions in pleasure craft insurance policies, 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 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 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.