Paper 2 General Insurance Quiz 18

The question tests the understanding of the core components typically found in a company’s published declaration of service standards, as outlined in the provided text. These declarations are designed to inform policyholders and intermediaries about the company’s commitments. Option (a) correctly identifies the commitment to quality and service as a fundamental element of such declarations. Options (b), (c), and (d) represent specific aspects that might be included, but the overarching commitment to quality and service is the most encompassing and foundational promise.

This question tests the understanding of the specific exclusions within a Product Liability policy. Option (a) correctly identifies that liability stemming from the inherent design or formulation of a product, such as a cabinet unable to support a weight exceeding its specified limit, is typically not covered. Options (b), (c), and (d) describe situations that might be covered under a Product Liability policy or are general exclusions not specific to the design flaw scenario presented. For instance, liability for property damage caused by a defective product (like the car in the CD player example) is generally covered, and liability for injury to bystanders is also a common coverage extension. Contractual liability is a common exclusion, but the scenario focuses on a design defect, not a breach of contract.

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

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 drivers with an entitlement of four or more claim-free years (equivalent to 50% or 60% NCD), a single claim in the policy year will result in a reduction of the NCD to 20% or 30% respectively upon renewal. This means the discount is not entirely lost but is significantly reduced, requiring subsequent claim-free years to rebuild to the previous level. 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 higher NCD entitlements.

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 by providing a safety net where such insurance is unavailable or ineffective, ensuring that victims can still receive compensation. Therefore, understanding the foundational legislation for compulsory motor insurance is key.

The Code of Conduct for Insurers, established by the Hong Kong Federation of Insurers (HKFI), specifically addresses the expected standards of good insurance practice for personal insurance policies sold to individual policyholders residing in Hong Kong. It covers a broad spectrum of practices, including underwriting, claims handling, product understanding, customer rights, and advising/selling practices. The Insurance Companies Ordinance (ICO) primarily focuses on the regulatory framework for insurers themselves, such as authorization, capital requirements, and solvency margins, aiming to ensure their financial stability and viability. While the ICO provides a statutory basis for intermediaries, the Code of Conduct for Insurers is the document that details the expected conduct and practices of insurers in their dealings with policyholders, particularly concerning the quality of service and adherence to good insurance principles.

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 (e.g., a digger being used for digging). While compulsory insurance laws mandate certain third-party cover, this exclusion applies to the *scope* of the voluntary cover provided by the insurer beyond the statutory minimums. Food poisoning claims are also excluded, as is damage to the vehicle’s own stock-in-trade. Damage to roads or weighbridges due to the vehicle’s weight or vibration is another specific exclusion. Therefore, the use of a vehicle as a tool of trade, except where mandated by compulsory insurance, is a key exclusion.

The scenario describes an insurance broker who, to secure a new client, offers a portion of their commission back to the client. This practice, known as rebating, is explicitly addressed in the provided text. While sometimes seen as a harmless gesture, it is considered a grave matter if used as an improper inducement to gain business. The question tests the understanding of this principle and its ethical implications within the insurance industry, specifically referencing the potential for it to be an improper inducement, which is a key concern for regulators and professional bodies.

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 whose breach does not void the entire contract but rather invalidates a specific claim. The scenario describes a notification requirement where failure to comply leads to the forfeiture of rights related to a claim, fitting the definition of a condition precedent to liability. A condition precedent to the contract would prevent the contract from commencing in the first place. A condition subsequent to the contract would typically occur after the contract is in force and its breach might have consequences, but the phrasing here specifically links the breach to the invalidation of a claim, not the contract’s existence or a general post-contractual event. Representations, while important, are statements of fact that need to be substantially true if material, and their breach has different implications than a condition precedent to liability.

The scenario describes a situation where an insurer has consistently accepted late premium payments without objection. This pattern of behavior, if it leads the insured to reasonably believe that punctuality is no longer a strict requirement, can lead to the insurer being prevented from enforcing the strict contractual term of timely payment in the future. This legal principle is known as waiver, where the insurer, through its conduct, relinquishes its right to insist on strict adherence to the premium payment deadline. Estoppel also applies if the insured reasonably relied on this conduct to their detriment. Therefore, the insurer’s past acceptance of late payments without protest is the most direct cause for the potential loss of their right to enforce strict punctuality.

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. This is achieved through a ‘specially worded exclusion’ or an endorsement that carves out the problematic element while allowing the rest of the policy to remain in force. This allows the insurer to offer coverage for the standard risk while mitigating losses from the identified adverse factor, rather than outright declining the entire policy. Options B, C, and D describe different concepts: a market exclusion is a general exclusion common across the industry (e.g., war risks), a general exclusion is a broad exclusion applicable to all policies of a certain type, and a policy renewal is the process of continuing an existing contract, not a method of modifying coverage for specific risks within an existing term.

This question tests the understanding of exclusions in Directors’ and Officers’ (D&O) liability insurance, specifically concerning actions taken by the insured. The scenario describes a director making a decision that, while not fraudulent, leads to a financial loss for the company due to a misjudgment. D&O policies typically exclude claims arising from dishonesty or fraud of the insured director. However, a mere misjudgment or poor business decision, even if it results in financial loss, is generally covered as a ‘wrongful act’ unless specifically excluded. The exclusion for ‘personal profit’ applies when the director benefits unfairly, which is not indicated here. ‘Known circumstances’ exclusion would apply if the director was aware of a problem before the policy inception and acted despite it, which is also not stated. Therefore, the most appropriate exclusion, if any, would relate to the director’s personal gain or intentional wrongdoing, neither of which is present in the scenario.

The question probes the understanding of prohibited practices in the insurance intermediary sector, specifically concerning rebating. Rebating, in this context, refers to offering inducements or benefits to policyholders or potential clients that are not part of the standard policy terms or published commission structures. This practice is seen as undermining fair competition and the integrity of the insurance pricing mechanism. The Code of Practice for the Administration of Insurance Agents and the Minimum Requirements of the Model Agency Agreement explicitly address this. Offering a portion of the commission to an employee of the insured without the insured’s explicit written consent is a direct violation of these regulations, as it can be construed as an unfair inducement and potentially a form of bribery or corruption, distorting the true cost of insurance and the basis for reward. Therefore, such an action is considered a breach of professional conduct and regulatory requirements.

This question tests the understanding of how an excess works in motor insurance. An excess is the amount the policyholder agrees to pay towards a claim. In this scenario, the damage is HK$12,000 and the voluntary excess is HK$2,000. Therefore, the insurer will pay the remaining HK$10,000. The question specifically asks what the insurer will pay, not the total loss or the amount the insured pays. The “Avoidance of Certain Terms and Right of Recovery” clause is a separate provision related to breaches of policy conditions and does not affect the calculation of the insurer’s payout based on the excess.

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 direct liabilities to third parties, which would fall under a different type of insurance.

The question tests the understanding of which vessels are subject to registration in Hong Kong under the relevant legislation. Option (a) correctly identifies vessels regularly employed in trading to or from Hong Kong, unless already registered elsewhere. Option (b) is incorrect because pleasure craft are specifically mentioned as requiring registration. Option (c) is incorrect as it describes a category of vessels that *do* require registration. Option (d) is incorrect because it describes a specific type of vessel (sea fishing) that is subject to registration, not an exemption.

The question probes the understanding of prohibited practices in the insurance intermediary sector, specifically concerning rebating. Rebating, in essence, is the offering of inducements or benefits to a policyholder 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 and can lead to unfair competition. The Code of Practice for the Administration of Insurance Agents, along with provisions in agency agreements, aims to prevent such practices. Offering a portion of the commission to an employee of the insured, without the insured’s explicit written consent, falls under the definition of rebating. This is because it provides a financial incentive to an individual associated with the insured entity, which is not part of the standard insurance transaction and could influence the decision-making process in a way that bypasses the insured’s direct benefit or knowledge. Such actions undermine the integrity of the insurance market by compromising the principle of fair pricing and honest reward for intermediaries.

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

The question tests the understanding of the insured’s duty to minimize loss after a claim event. While cooperating with the insurer and providing proof of loss are crucial duties, the primary obligation in the immediate aftermath of a loss, as per common law and policy conditions, is to take reasonable steps to prevent further damage or escalation of the loss. This includes actions like protecting damaged property from further harm, which directly relates to minimizing the overall claim amount. Admitting liability to a third party without the insurer’s consent would prejudice the insurer’s rights, and while fraud is always a breach of duty, the scenario focuses on the immediate post-loss actions to mitigate damage.

This question tests the understanding of the specific definition of ‘loss of one limb’ within a travel insurance policy’s personal accident section. The scenario describes an injury that causes functional impairment but not physical severance or total functional disablement as defined in the policy. The case highlights that unless the policy explicitly provides for proportional compensation for partial permanent disability or partial functional loss, a claim based on such a condition would be rejected if it doesn’t meet the strict definition of ‘loss of one limb’ (physical severance or total functional disablement). Therefore, the insurer’s rejection of the claim for partial disablement is consistent with the policy’s terms as interpreted by the Complaints Panel.

The question tests the understanding of the scope of theft insurance, specifically concerning damage to the premises during an attempted theft. According to the provided text, theft policies typically include coverage for damage caused by thieves to the insured premises when making forcible and violent entry or exit. This damage is not subject to a separate sum insured but is covered under the general policy for stock and specified contents. Option (a) accurately reflects this by stating that damage to the premises during forcible entry or exit is covered. Option (b) is incorrect because while theft by staff is excluded, the question is about damage to the premises during theft, not the theft itself by staff. Option (c) is incorrect as fire damage is explicitly excluded from theft policies. Option (d) is incorrect because while warranties are common, the question is about what is included in the cover, not the conditions for it.

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 confirms their commitment and obligations under the contract. While a simple contract can be verbal or inferred from conduct, and specific exclusions are tailored to individual risks, and a survey report is a document detailing findings, the Signature Clause is the component that legally binds the insurer within the Scheduled Policy Form.

Institute Cargo Clauses (A) provides the broadest coverage, insuring against all risks of loss or damage to the subject matter insured, except for those specifically excluded. This ‘all risks’ nature means that if a loss occurs and it is not listed as an exclusion, it is generally covered. Clauses (B) and (C) offer more limited protection, covering only a specified list of perils. Therefore, a loss caused by a peril not explicitly mentioned in Clauses (B) or (C) would not be covered under those clauses, but would be covered under Clause (A) unless it falls under an exclusion.

This question tests the understanding of how changes in the insured risk can impact an insurance policy, specifically focusing on the underwriter’s perspective. When the original circumstances under which a risk was insured alter for the worse, it signifies an increase in the probability or severity of a claim. This necessitates a review of the policy terms and premium. The underwriter’s primary responsibility is to ensure the premium accurately reflects the risk. Therefore, an increase in risk would typically lead to a review and potential adjustment of the premium to maintain the policy’s viability and profitability, aligning with the principle of indemnity and the underwriter’s duty to assess risk accurately. Options B, C, and D represent actions that are either incorrect, irrelevant, or secondary to the fundamental need to re-evaluate the risk and its pricing.

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 entry or exit from the premises. The other options represent different insurance concepts: ‘Franchise’ relates to the deductible amount that applies to claims, ‘Fundamental Risks’ are typically excluded due to their catastrophic potential, and ‘General Exceptions’ are broad policy limitations that apply across various sections of the policy.

In the context of insurance contracts, a ‘representation’ is a statement of fact made by the proposer before the contract is concluded. The principle of utmost good faith (uberrimae fidei) requires that such representations, particularly those concerning material facts, must be substantially true. If a representation is found to be untrue, and it relates to a material fact that influences the insurer’s decision to accept the risk or the terms offered, the insurer may have grounds to void the contract. The requirement is for substantial truth, meaning minor inaccuracies that do not affect the risk assessment are generally acceptable, but significant falsehoods can invalidate the policy. Options (b), (c), and (d) present absolute or overly strict requirements that are not aligned with the legal standard for representations in insurance.

This question tests the understanding of the ‘claims-made’ basis for liability insurance, a crucial concept for IIQE candidates. A claims-made policy covers claims that are both made against the insured and reported to the insurer during the policy period, or an extended reporting period. Option (a) describes ‘occurrence-based’ coverage, where the event causing the claim must have occurred during the policy period, regardless of when the claim is made. Option (b) is incorrect as claims made before the policy began are not covered. Option (c) is also incorrect because while settlement is important, the trigger for coverage under a claims-made policy is the making and reporting of the claim, not necessarily its settlement within the policy period.

The ‘step-back system’ for No Claim Discount (NCD) in private car insurance, as described 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 NCD on renewal to 20% or 30% respectively. This means the discount does not reset to zero but moves back a few steps. Options B, C, and D describe scenarios that are either incorrect interpretations of the step-back system or apply to different vehicle types or claim frequencies.

The question tests the understanding of the basis of cover for Public Liability (PL) insurance. The provided text explicitly states that PL insurance is usually written on a ‘claims-occurring’ basis, meaning that the policy covers incidents that occur during the policy period, regardless of when the claim is actually made. While ‘claims-made’ policies are not unknown, the standard practice for PL is ‘claims-occurring’. Therefore, a claim arising from an accident that happened within the policy year would be covered even if reported after the policy has expired, provided the policy’s notification requirements are met.

This question assesses the understanding of the multifaceted impact of poor customer service on an insurance company’s operations and reputation. The “take it or leave it” approach, while seemingly a direct cost-saving measure, leads to a cascade of negative consequences. Loss of business is a direct result of customers seeking better service elsewhere. Insurance intermediaries, crucial for business generation, will withdraw their support if they cannot rely on the insurer’s service quality, impacting their own productivity and willingness to promote the insurer. Furthermore, a reputation for poor service erodes market prestige, making it difficult to attract new business and potentially inviting regulatory scrutiny, as governments aim to protect consumers and maintain the territory’s financial services standing. Customer loyalty is built on positive experiences, and a lack of it, coupled with negative word-of-mouth, directly hinders profitability. Therefore, all these factors are significant negative outcomes of subpar customer service.