Paper 2 General Insurance Quiz 19

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 their rights and well-being throughout the insurance lifecycle. While an insurer’s role as a good corporate citizen is important, the Code’s primary focus is on the direct conduct of insurance business and customer protection, rather than broader corporate social responsibility initiatives.

The scenario describes a situation where a proposer for a fire insurance policy fails to disclose that they store highly flammable materials on the insured premises. This fact significantly increases the risk of a fire, beyond what a prudent underwriter would typically expect for a general business. According to the principles of utmost good faith and the duty of disclosure, a proposer must reveal all material facts that could influence an underwriter’s decision. Facts that render a risk greater than would otherwise be supposed, such as the presence of highly flammable materials, are considered material facts that must be disclosed. Failure to do so can lead to the insurer voiding the policy. Options B, C, and D describe situations that are either not material, are common knowledge, or are the insurer’s responsibility to discover, none of which apply to the undisclosed storage of hazardous materials.

This question tests the understanding of the legal implications of policy renewals 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 be introduced. 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 ‘freely’ negotiable in the sense that the insurer can unilaterally change them without notice or agreement; renewals often involve standard terms or specific conditions set by the insurer, and significant changes require clear communication and acceptance by the insured. Therefore, statements (i), (ii), and (iv) are the accurate assertions regarding general insurance policy renewals.

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. These losses typically include the loss of gross profit and continuing expenses. While the physical damage to buildings or contents is covered by a separate fire insurance policy, the business interruption policy addresses the consequential financial impact of that damage. It does not cover legal liabilities to third parties, which would fall under a different type of insurance.

The scenario describes a situation where an insurer has consistently accepted late premium payments without objection. This pattern of conduct, 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 actions, relinquishes its right to enforce a specific contractual condition. 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 suggests a waiver of the strict punctuality clause.

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 rest with the assured. Loss adjusters, on the other hand, are usually appointed and paid by the insurer to investigate and negotiate claims, particularly for non-marine losses.

A condition precedent to the contract is a term that must be fulfilled for the insurance contract to become effective. In this scenario, the insurer requires the applicant to undergo a medical examination before issuing the policy. If this examination is not completed, the contract cannot commence, making it a condition precedent to the contract. A condition precedent to liability relates to a claim being valid after the contract is in force, a condition subsequent to the contract is a term to be complied with during the policy’s currency, and consequential loss refers to losses that follow from an insured event, not a condition for contract inception.

Average adjusters are specialists in marine insurance, particularly in the complex area of General Average (GA) claims. Their expertise is crucial due to the intricate legal knowledge required (international and national maritime laws), the large number of parties often involved (e.g., numerous cargo owners), and the lengthy investigation periods typically needed to settle these claims. While Lloyd’s Agents and Loss Adjusters are also involved in claims handling, their roles differ. Lloyd’s Agents often act as survey agents for marine underwriters, and Loss Adjusters are more commonly used in non-marine general insurance claims. Arbitration clauses, while a method of dispute resolution, are distinct from the specialized role of an average adjuster in calculating and apportioning GA claims.

An insurance broker acts as an agent for the proposer, meaning they are legally identified with the proposer. This agency relationship imposes a duty of utmost good faith. If a broker withholds or misrepresents material facts, this breach of good faith is imputed to the proposer. This can lead to the insurer voiding the contract. Therefore, a broker’s failure to disclose material information is considered a breach of the proposer’s duty, not a direct breach by the insurer or a simple administrative error.

The ‘step-back system’ for No Claim Discount (NCD) in private car insurance, as outlined in the IIQE syllabus, dictates how a claim affects future discounts. For drivers with an entitlement of four or more claim-free years (equivalent to 50% or 60% NCD), a single claim reduces their NCD to 20% or 30% respectively on renewal. This means they don’t lose their entire accumulated discount but rather revert to a lower tier. The scenario describes a driver with a 60% NCD who has one claim. According to the step-back system for private cars, this would result in a 30% NCD on renewal, not a complete loss of discount or a reduction to 0%. The other options represent incorrect applications of the NCD rules, either by assuming a complete loss of discount after one claim (which applies to other vehicle types) or by misinterpreting the severity of the reduction.

This question tests the understanding of how changes in the insured risk can impact the policy. The Insurance Companies Ordinance (Cap. 41) and related common law principles dictate that if the circumstances under which a 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 original assessment of the risk, which formed the basis of the premium and terms, is no longer valid. Option B is incorrect because while an insurer might adjust premiums, cancellation is a more direct response to a significant worsening of the risk. Option C is incorrect as a policy is not automatically voided by a change in circumstances; it’s the insurer’s right to cancel. Option D is incorrect because while an insurer might seek additional information, the core issue is the change in the risk itself, not just the need for more data.

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. Therefore, occupation is the fundamental basis for premium calculation in this context, not the sum insured, the insured’s gender, or the presence of sickness cover.

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 scenario describes a shop owner whose wallet containing business cash went missing after closing hours while she was on her way home. The money insurance policy explicitly states that cover is for losses occurring during normal business hours while being conveyed by a messenger. Since the loss happened outside of business hours, it falls outside the policy’s defined scope of coverage. Therefore, the insurer’s rejection of the claim is justified based on the policy’s terms and conditions, specifically the temporal limitation on the coverage.

The scenario highlights the importance of the insured’s duty to notify the insurer of a potential claim. While the insured reported the damage within 20 days, the key issue is whether this constitutes ‘as soon as reasonably possible,’ especially after the repair had already been completed. The Complaints Panel acknowledged that the repair prejudiced the insurer’s ability to investigate. However, they considered the layman’s perspective and the simplicity of the circumstances, ultimately giving the insured the benefit of the doubt. This implies that while a strict interpretation of ‘as soon as reasonably possible’ might favor the insurer, the panel considered mitigating factors. The question tests the understanding of the insurer’s right to investigate and the insured’s obligation to facilitate this, even in seemingly straightforward cases, and how the concept of ‘prejudice’ is weighed against the insured’s actions and the nature of the claim.

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 implications, 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 having no differential impact on premiums, all else being equal. Therefore, occupation is the core determinant for standard premium calculation in PA policies.

The Employees’ Compensation Ordinance in Hong Kong establishes a strict liability framework for employers. This means that an employer is legally obligated to compensate an employee for injuries or death sustained in accidents that arise out of and in the course of their employment, regardless of whether the employer was at fault. The ordinance mandates insurance to cover these liabilities. Therefore, the core purpose of Employees’ Compensation insurance is to cover the employer’s legal obligations to employees for work-related injuries or fatalities, irrespective of fault.

The question tests the understanding of an insurer’s obligation regarding policy renewals. According to general insurance principles, an insurer is not legally mandated 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 insurer is not obligated to provide a reminder for renewal.

The question tests the understanding of the specific limitations of motor insurance policies for motorcycles, particularly concerning theft claims. According to the provided text, for motorcycles, theft claims are only admissible if the entire machine is stolen. This implies that claims for the loss of accessories alone are not covered under the ‘Own Damage/Accidental Damage’ section of a motorcycle policy. Therefore, a scenario where only a motorcycle’s engine is stolen would not be covered.

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, 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 policyholder needs to prove the cause was one of the listed events, which aligns with the definition of ‘Specified Perils’ cover.

This question tests the understanding of exclusions in a Product Liability policy, specifically concerning liability arising from the design or specifications of the product. The scenario describes a TV cabinet designed to hold a maximum of 50 kg, which fails when a 55 kg TV is placed on it. According to typical Product Liability policy wording, liability stemming from a defect in the design, plan, formula, or specification of the goods is generally excluded. Therefore, the insurer would likely deny coverage for the damage caused by the cabinet’s collapse due to its insufficient design capacity.

The Code of Conduct for Insurers, established by the Hong Kong Federation of Insurers (HKFI), specifically addresses the standards expected in various aspects of the insurance business. Among these are the fair, efficient, and prompt handling of claims, which is a crucial element of customer service and regulatory compliance. While other regulations might touch upon claims, the Code of Conduct for Insurers directly outlines these specific expectations for the industry.

The scenario describes an individual injured while ice-skating. The insurer denied the claim based on a ‘winter-sports’ exclusion. The Complaints Panel, in interpreting this exclusion, considered that ‘winter-sports’ generally refers to sports taking place on snow or ice. Ice-skating, regardless of whether it’s indoors or outdoors, falls under this interpretation. Therefore, the exclusion for participating in winter sports would apply, leading to the rejection of the claim. This aligns with the principle that policy exclusions are interpreted based on their common understanding and the nature of the activity, even if not explicitly defined within the policy document itself, as long as the interpretation is reasonable and consistent with the intent of the exclusion.

Average adjusters are specialists in marine insurance, particularly in the complex area of General Average (GA) claims. Their expertise is crucial due to the intricate legal knowledge required (international and national maritime laws), the large number of parties often involved (e.g., numerous cargo owners), and the lengthy investigation periods typically needed to settle these claims. While Lloyd’s Agents and Loss Adjusters are also involved in claims handling, average adjusters are specifically retained for the unique demands of GA, and sometimes for complex hull or cargo losses, distinguishing them from the more general roles of the others.

The scenario describes a situation where an insurer rejected a hospitalization claim due to a pre-existing condition. The insured had consulted for rectal bleeding 15 months prior to the application, and the insurer argued that the size of the diagnosed colon tumor indicated it could not have developed within 10 days of policy inception. The Complaints Panel, considering the tumor’s size and the policy’s exclusion for illnesses presenting signs and symptoms before the policy commencement date, supported the insurer’s decision. This aligns with the principle that if an illness’s onset or symptoms were present before the policy began, claims related to it may be denied, even if the formal diagnosis occurs after the policy inception. The difficulty in ascertaining the exact onset date is a common challenge in applying such exclusions, but the evidence (tumor size) allowed the panel to infer the condition likely predated the policy.

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 of this system is the employer’s responsibility to implement and maintain robust internal controls over their employees who are covered by the insurance. This includes establishing clear procedures, regular audits, and accountability measures to prevent or detect fraudulent activities. Option (a) accurately reflects this proactive role of the employer in managing the risk associated with guaranteed staff. Option (b) is incorrect because while the insurer sets policy terms, the primary responsibility for day-to-day internal control lies with the employer. Option (c) is incorrect as the focus is on the employer’s internal systems, not external regulatory bodies. Option (d) is incorrect because while employee background checks are part of a good system, they are only one component, and the ‘System of Check’ encompasses a broader framework of ongoing controls.

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 (meaning a 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 several claim-free years to rebuild to the previous level. Options B, C, and D describe scenarios that are either incorrect (no impact from a claim) or describe the treatment for other vehicle types (complete loss of NCD for any claim) or a different consequence (immediate loss of all NCD).

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 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 unearned benefit to a party associated with the insured, thereby compromising the integrity of the commission structure and potentially influencing the decision-making process based on factors other than the policy’s merits.

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