Paper 2 General Insurance Quiz 15

Moral hazard refers to the increased likelihood of a loss occurring because an individual is insured. This can manifest in various ways, including dishonesty (fraud), carelessness leading to accidents, unreasonableness in decision-making that exacerbates risk, and negative social behaviour like vandalism. While dishonesty is a direct form of moral hazard, carelessness and unreasonableness, even if not intentionally fraudulent, also increase the probability of claims due to altered behaviour stemming from the presence of insurance. Social behaviour, such as vandalism, is a broader societal issue but can be considered a manifestation of moral hazard when it directly impacts insured property or risks.

The scenario describes a situation where an insurer provides a replacement item for a non-depreciating subject matter that has been damaged. This aligns with the definition of ‘Replacement’ as a method of indemnity where the insured receives a new item to substitute the damaged one, particularly when the original item’s value doesn’t decrease over time. ‘Reinstatement’ involves restoring the damaged property to its pre-loss condition, which is not applicable here as a new item is provided. ‘Salvage’ refers to the residual value of damaged property, and ‘Repatriation Expenses’ are costs associated with returning a deceased insured’s remains. Therefore, ‘Replacement’ is the most accurate term for the indemnity provided.

In marine insurance claims, the assured (the policyholder) is typically responsible for arranging and initially paying for a surveyor’s report. This report is crucial for independently investigating the cause and extent of a reported loss. While the surveyor’s fee is generally recoverable from the insurer if the claim is valid, the initial appointment and payment rest with the assured. Loss adjusters, on the other hand, are usually appointed and paid by the insurer, acting as independent experts for claims investigation and negotiation, particularly for property and liability losses.

The Employees’ Compensation Ordinance (ECO) mandates compulsory insurance for employers to cover their liability for employee injuries or deaths arising out of and in the course of employment. While the ECO covers accidents, it does not typically cover liabilities arising from breaches of contract unless those breaches also result in an injury covered by the ordinance. Product liability insurance, on the other hand, specifically addresses the manufacturer’s or seller’s duty of care to consumers regarding defective products, which is distinct from an employer’s liability to its employees. Therefore, a claim for a defective product causing harm to an employee would fall under product liability, not the compulsory employees’ compensation insurance, unless the defect also constituted an accident covered by the ECO.

A Scheduled Policy Form is a type of insurance contract that includes a policy schedule. This schedule details specific information about the policy, such as the insured party, the risks covered, the sum insured, and the premium. 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, thereby confirming their undertaking. While other clauses like ‘Specific Exclusions’ and ‘Specification’ are important components of insurance policies, they do not represent the insurer’s formal confirmation of their commitment in the same way the Signature Clause does. A ‘Simple Contract’ refers to a contract not under seal, which is a broader legal classification and not specific to the insurer’s confirmation within a policy document.

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, the Operative Clause defines the scope of coverage and perils, and General Exceptions apply universally across the policy. Therefore, identifying the specific details of the insured’s occupation and the sum insured falls under the purview of the Schedule.

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. Without physical damage covered by the material damage policy, the BI policy will not respond to losses arising from the interruption. Therefore, if a fire occurs but the material damage policy is invalid or does not cover the specific cause of the fire, the BI policy’s claim will be denied.

The question tests the understanding of specific exclusions in third-party liability cover for commercial vehicles, as distinct from private car policies. The ‘tool of trade’ clause specifically excludes damage caused when a vehicle is used as a tool for its primary function, such as a mechanical digger performing excavation. This exclusion is generally not applicable to private car third-party cover. While food poisoning claims and damage to stock-in-trade are also exclusions for certain commercial vehicles (like food vendors), and damage to roads due to vehicle weight is another exclusion, the ‘tool of trade’ clause is a fundamental distinction for vehicles designed for specific operational purposes beyond mere transport.

A condition precedent to the contract is a term that must be fulfilled for the insurance contract to become effective. Without this condition being met, the insurer has no obligation to provide cover. In this scenario, the policyholder’s failure to provide the requested medical report before the policy’s commencement date means the condition precedent was not satisfied, thus the contract never legally began, and no claim can be made.

The “step-back system” for No Claim Discount (NCD) in private car insurance, as described in the IIQE syllabus, means that a single claim does not automatically reset the NCD to zero. Instead, it reduces the accumulated discount. For drivers with a 50% or 60% NCD, a single claim typically reduces their NCD to 20% or 30% respectively, requiring them to rebuild their discount over subsequent claim-free years. The other options describe scenarios that would lead to a complete loss of NCD or are not directly related to the “step-back” mechanism for private cars.

A voluntary excess, also known as a ‘self-insured retention’ or ‘excess requested by the insured’, is an amount that the policyholder agrees to bear themselves in the event of a claim. This is typically offered by insurers as a way to reduce the premium. The insured chooses a higher excess amount in exchange for a lower premium. This is in addition to any compulsory excess that might apply to the policy, such as a young driver excess.

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 provisions, 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 which primarily serves as proof of compulsory insurance.

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. This is a key feature of agreed value policies for items like jewelry and antiques, designed to avoid disputes over valuation in case of a complete loss. For partial losses, however, the principle of strict indemnity typically applies, meaning the payout would be based on the actual loss incurred, not the agreed value. Therefore, the agreed value is payable for a total loss, but strict indemnity applies to partial losses.

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 often in a better position financially due to the improved condition and lifespan of the new components. This enhancement is termed ‘betterment’. The insurer is generally not obligated to cover the full cost of new parts if they provide a benefit beyond mere restoration. The scenario highlights that the insured vehicle was eight years old, and the insurer applied a 35% betterment contribution, which was deemed reasonable given the vehicle’s age and the typical depreciation rates. The policy’s exclusion of depreciation further supports the insurer’s stance on not covering the full cost of new parts without a betterment contribution. Therefore, the insured is responsible for the betterment contribution as it represents the value added by the new parts compared to the depreciated value of the original parts.

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, the Operative Clause defines the scope of coverage and perils, and General Exceptions apply universally across the policy. Therefore, identifying the specific details of the insured’s occupation and the sum insured falls under the purview of the Schedule.

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 provisions, 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 situation where an insured person sustained an injury that prevented them from performing their usual duties for a period. The insurer paid a benefit for temporary total disability for eight days and temporary partial disability for five days. The insured believed they should receive temporary total disability benefits for the entire 13 days. The Complaints Panel’s decision was based on the nature of the injury and the insured’s occupation. Since the insured was a self-employed director whose work primarily involved office duties, and the injury (contusion to the sacrum) did not involve fractures or nerve damage, the panel concluded that the insured should have been able to perform some of their duties after eight days. This means that for the remaining five days, the insured’s condition met the definition of temporary partial disability, not temporary total disability, as per the policy terms. Therefore, the insurer’s offer, which differentiated between the two types of benefits, was deemed appropriate.

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 policy, such as a pre-existing back condition in personal accident insurance or a high-risk driver 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’ or an endorsement that carves out the problematic element. Option (a) accurately describes this practice of tailoring coverage by excluding specific risks while allowing the rest of the policy to remain in force. Option (b) is incorrect because while insurers can limit coverage, the term ‘endorsement’ typically refers to adding or modifying coverage, not solely excluding it, although exclusions can be part of endorsements. Option (c) is incorrect as ‘market exclusions’ are generally standard exclusions applied across the industry for fundamental risks, not specific to individual policy underwriting decisions based on personal circumstances. Option (d) is incorrect because ‘public policy’ exclusions are based on legal and societal principles, not on specific underwriting decisions for individual policy risks.

A condition precedent to the contract is a term that must be fulfilled for the insurance contract to become effective. Without this condition being met, the insurer has no obligation to provide cover. For example, if a policy states that the insured must undergo a medical examination before the policy commences, and this examination is not completed, the contract is not in force. This contrasts with a condition precedent to liability, which relates to the validity of a specific claim after the contract is already in effect, and a condition subsequent, which is a term to be complied with during the policy’s currency.

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, provided it does not exceed the sum insured. The other options represent incorrect calculations or misinterpretations of the average clause.

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 notification of a profession change, and explicitly states that failure to do so results in forfeiture of rights for that specific claim, aligning with the definition of a condition precedent to liability. Option B describes a condition precedent to the contract, which must be met for the contract to even begin. Option C describes a condition subsequent, which, if it occurs, can terminate an existing contract. Option D is a distractor as it describes a general policy provision without specifying its temporal impact on the contract or claims.

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 with the insurer only after the repair was completed and the watch was collected, which was two weeks after the incident. The provided text (specifically section 3.1.3 (a) Notification to the insurer) emphasizes that instructions regarding the manner and timing of claim notification must be followed. While the insured acted promptly to get the watch repaired, the delay in notifying the insurer about the potential claim, after the repair was finalized, could be a breach of the policy’s notification clause, which typically requires notification ‘as soon as possible’ after the loss occurs, not after the repair is completed. This delay might impact the insurer’s ability to investigate the loss effectively or verify the necessity and cost of the repairs. Therefore, the claim might be considered invalid due to a potential breach of the notification condition.

The Employees’ Compensation Ordinance in Hong Kong mandates that employers must provide compensation to employees for injuries or death arising out of and in the course of their employment. This liability is considered ‘strict’ because it does not depend on the employer’s fault. The scenario describes an employee injured in a traffic accident while on her way home after a client meeting. To determine if this falls under the employer’s Employees’ Compensation (EC) policy, the key consideration is whether the accident occurred ‘arising out of and in the course of employment’. While the meeting was work-related, the journey home by taxi is generally considered a personal commute, not directly part of the employment duties. Therefore, the injury is unlikely to be covered under the strict interpretation of the ordinance. Option B is incorrect because while the employer has a duty of care, the EC Ordinance’s coverage is specific to accidents during employment. Option C is incorrect as the question is about statutory liability under the EC Ordinance, not common law negligence which would require proving fault. Option D is incorrect because the policy is designed to cover the employer’s legal liability, and the scenario raises a question about whether that liability exists under the specific circumstances.

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 legal role beyond simply acknowledging coverage. Therefore, the certificate’s primary function is to satisfy a legal requirement for compulsory insurance, not to provide a summary of the policy’s specific terms or benefits.

In the context of marine insurance claims, the assured (the policyholder) is typically responsible for arranging and initially paying for a surveyor’s report. This report serves as an independent assessment of the cause and extent of the loss. While the surveyor’s fee is generally recoverable from the insurer as part of a valid claim, the initial appointment and payment usually fall to the assured. This contrasts with non-marine loss adjusters, who are more commonly appointed and paid by 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 explicitly stated in the policy contract. This practice is considered unethical and potentially illegal because it distorts the true cost of insurance, undermines fair competition, and can be a form of bribery or corruption. The Code of Practice for the Administration of Insurance Agents and the Minimum Requirements of the Model Agency Agreement are key regulatory documents that prohibit such practices. Offering a portion of the commission to an employee of the insured without the insured’s explicit written consent falls directly under the definition of rebating, as it provides an unauthorized benefit to a party associated with the policyholder, thereby compromising the integrity of the insurance transaction and the intermediary’s professional conduct. This action is not merely a customer service gesture but a violation of established ethical and regulatory standards designed to ensure transparency and fairness in the insurance market.

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.

A ‘Condition Precedent to the Contract’ is a term that must be fulfilled for the insurance agreement to become effective. Failure to meet this condition means the contract never truly commenced. In contrast, a ‘Condition Precedent to Liability’ relates to a term whose breach invalidates a specific claim, but the contract itself may still be in force. A ‘Condition Subsequent to the Contract’ is a term that must be adhered to during the policy’s currency, and its breach might lead to the termination of cover or other consequences, but it doesn’t prevent the contract from initially starting or invalidate a claim that occurred before the breach. ‘Consequential Loss’ refers to indirect financial losses resulting from an insured event, which are typically excluded from property insurance unless specifically covered under a business interruption policy.

The Motor Vehicles Insurance (Third Party Risks) Ordinance mandates compulsory third-party motor insurance in Hong Kong. This ordinance ensures that victims of motor accidents have a legal recourse for damages caused by negligent drivers. The Motor Insurers’ Bureau of Hong Kong (MIB) plays a crucial role in fulfilling the intentions of this compulsory insurance by providing coverage when a valid policy is not in place or is ineffective, thereby safeguarding the public interest.

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