Paper 2 General Insurance Quiz 21

This question tests the understanding of how changes in the insured risk can impact the insurance contract. 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. This is because the original assessment of the risk, and therefore the premium charged, may no longer be adequate. The scenario describes a business that has significantly increased its use of flammable materials, a clear alteration for the worse in the risk profile, particularly for fire insurance. This change directly affects the likelihood and potential severity of a claim. Option B is incorrect because while an insurer might adjust terms, the fundamental principle allows for cancellation when the risk deteriorates significantly. Option C is incorrect as the policyholder’s financial stability, while a factor in overall underwriting, is not the primary reason for cancellation in this specific scenario of increased physical hazard. Option D is incorrect because while a premium adjustment might be considered, the significant worsening of the risk often leads to more drastic actions, including cancellation, especially if the new risk level is uninsurable at any reasonable premium.

This question assesses the understanding of an insurance broker’s obligations regarding client funds, specifically the requirement to maintain separate client accounts. The Insurance Authority mandates this practice to ensure client monies are segregated from the broker’s own operational funds, thereby safeguarding client assets and preventing commingling, which is a critical aspect of financial probity and regulatory compliance for insurance brokers in Hong Kong. Failure to adhere to this can lead to serious regulatory action.

This question tests the understanding of how changes in the insured risk can impact an insurance policy. The Insurance Ordinance (Cap. 41) and general insurance 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. This is because the original assessment of the risk, and therefore the premium charged, may no longer be adequate to cover the increased likelihood or severity of a claim. Option B is incorrect because while an insurer might adjust the premium, the fundamental right to cancel due to a significantly worsened risk is a key principle. Option C is incorrect as the insurer’s obligation is to assess the risk as it is, not to provide advice on how to mitigate it, although they might suggest it. Option D is incorrect because while the insured has a duty of disclosure, the insurer’s action is a response to a change in the risk itself, not solely a breach of disclosure.

The principle of indemnity in insurance aims to restore the insured to the financial position they were in before the loss. When new parts are used to repair an older vehicle, the new parts are inherently superior to the old, worn-out parts. This improvement in condition is termed ‘betterment’. The insurer is not obligated to provide a benefit beyond what the insured had prior to the loss. Therefore, a contribution from the insured towards the cost of new parts is generally required to account for this betterment, ensuring the policy remains one of indemnity and not profit. The case highlights that the insurer’s calculation of a 35% betterment contribution for an eight-year-old vehicle was deemed reasonable by the Complaints Panel, especially given the policy’s exclusion of depreciation, which implicitly acknowledges the need to address the improved condition of the vehicle post-repair.

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 and severity 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 did not involve a fracture, nerve damage, or complications, the panel determined 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 only 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.

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. Specifically, it addresses the insurer’s responsibilities in underwriting and claims handling, ensuring fair treatment and efficient processing. It also explicitly details the rights and obligations of customers, empowering them with knowledge about their policies and the insurer’s duties. Furthermore, the Code emphasizes the importance of safeguarding customers’ rights and interests in all dealings. While an insurer’s role as a good corporate citizen is important, the Code’s primary focus is on the direct relationship and transactions between the insurer and the policyholder, rather than broader public image initiatives. Therefore, the areas covered are underwriting and claims, customers’ rights and obligations, and customers’ rights and interests generally.

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. While the provided text mentions that statutory liability may sometimes fall short of actual losses, the core principle is the employer’s responsibility for compensation under the ordinance, which is covered by the EC policy. Therefore, the EC policy is designed to cover the employer’s legal obligations stemming from the Employees’ Compensation Ordinance, which is a form of statutory liability.

The ‘step-back system’ for No Claim Discount (NCD) in private car insurance, as described in the IIQE syllabus, dictates how a discount is adjusted after a claim. For drivers with an entitlement of four or more claim-free years (equivalent to 50% or 60% NCD), a single claim in the policy period 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 Employees’ Compensation Ordinance (ECO) mandates that employers must provide compensation to employees for injuries or death arising out of and in the course of employment. Employees’ Compensation Insurance (ECI) policies are designed to cover an employer’s liability under this ordinance. However, employers can also have liability independent of the ECO, often referred to as common law liability, which arises from negligence or breach of statutory duty related to workplace safety. This common law liability is also covered by ECI policies. The question asks about the basis of an employer’s liability that is not directly stipulated by the ECO. This refers to the employer’s duty of care in tort, primarily negligence, which exists irrespective of the ECO. Therefore, liability arising from a breach of this duty of care, even if it results in an employee injury during employment, falls under the ‘liability independent of the EC Ordinance’ category.

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 instance, if a policy states that the insured must undergo a medical examination before the contract commences, and this examination is not completed, the contract is not in force. This is distinct from a condition precedent to liability, which relates to the validity of a specific claim after the contract is already in effect, or a condition subsequent, which is a term to be complied with during the policy’s currency.

This question tests the understanding of exclusions in engineering insurance, specifically Boiler Explosion Insurance. The provided text states that risks normally insurable by other policies, such as fire and extra perils, are excluded from Boiler Explosion Insurance. This is to prevent duplication of coverage and ensure that each policy covers distinct risks. Therefore, a fire that occurs during a boiler explosion would typically be covered by a separate fire insurance policy, not the boiler explosion policy.

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, which falls directly under the scope of dishonest acts covered by fidelity guarantee insurance. Options B, C, and D describe different types of insurance or concepts not directly applicable to this specific situation: General Liability Insurance covers third-party bodily injury or property damage, Professional Indemnity Insurance protects against claims of negligence in professional services, and a Performance Bond is a guarantee for contract fulfillment, not for employee dishonesty.

A Scheduled Policy Form is a common structure where the policy details, such as the insured’s name, the property covered, the sum insured, and the premium, are listed in a separate schedule that is attached to the main policy document. This schedule forms an integral part of the contract. The Signature Clause, also known as the Attestation Clause, is specifically the section within this scheduled policy form where the insurer formally signifies their agreement and commitment to the terms outlined in the policy. While a simple contract can be verbal or inferred from conduct, and specific exclusions are tailored to individual risks, and a step-back system relates to no-claim discounts, the Signature Clause is directly tied to the formalization of the Scheduled Policy Form.

This question tests the understanding of General Average (GA) sacrifice versus expenditure. A GA Act involves an extraordinary sacrifice or expenditure voluntarily and reasonably made to preserve the common adventure. Throwing cargo overboard is a physical loss or damage, thus a sacrifice. Towing a disabled vessel to a port of distress is an expense incurred to save the adventure, making it a GA expenditure. The scenario describes the deliberate jettisoning of a portion of the cargo to lighten the vessel and prevent it from grounding further, which is a classic example of a GA sacrifice.

The Insurance Claims Complaints Bureau (ICCB) is designed to handle disputes related to personal insurance claims. It has a monetary jurisdiction limit of HK$800,000. Complaints concerning amounts exceeding this limit fall outside the ICCB’s purview and must be addressed through other dispute resolution mechanisms such as litigation or arbitration. Therefore, a claim for HK$950,000 would not be eligible for the ICCB’s services.

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 a specific peril like ‘perils of the sea’ was explicitly listed and the rogue wave fell under that definition, which is less likely to be as comprehensive as the ‘all risks’ approach of (A). The question tests the understanding of the hierarchical coverage levels of the Institute Cargo Clauses.

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 law requires insurers to recover these documents upon policy cancellation due to their legal importance. Therefore, a certificate of motor insurance is primarily a legal document confirming compliance with compulsory insurance requirements, not a summary of policy terms.

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 deliberately 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 ship and cargo. Therefore, the most accurate description of the financial implication for the owner of the jettisoned goods is that they are entitled to a contribution from the other saved parties.

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.

A combined liability policy, as described in the context of insurance, is designed to consolidate various types of liability coverage into a single document. This typically encompasses public liability, products liability, and employees’ compensation liability. While other coverages like Directors’ and Officers’ Liability or Professional Liability can be added based on client needs, the core concept is the integration of these fundamental liability risks. The question tests the understanding of what constitutes the typical components of such a combined policy, distinguishing it from broader ‘umbrella’ policies or specific individual coverages.

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.

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 the insured to report changes in their profession. Failure to do so, as stipulated, would mean the insurer is not liable for any claims arising from that unreported change, directly 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 typically occurs after a contract is in force and may alter its terms or obligations. Option D is a distractor, as ‘materiality’ relates to representations, not the temporal classification of conditions.

The scenario describes a situation where an insured person sustained an injury and received a certain number of days of benefit. The insurer paid for a portion of the leave as temporary total disability (TTD) and the remainder as temporary partial disability (TPD). The insured disagreed, believing the entire period should be compensated as TTD. The Complaints Panel reviewed the case, noting the nature of the injury (contusion without fracture or nerve involvement), the insured’s occupation (self-employed director with primarily office duties), and the absence of complications. Based on these factors, the panel concluded that the insured could have performed some of her duties after eight days, thus qualifying for TPD for the remaining period, rather than TTD. This aligns with the principle that TPD benefits are typically lower than TTD benefits because the insured can still perform some work. Therefore, the insurer’s offer, reflecting different benefit amounts for TTD and TPD, was deemed appropriate.

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 the insurer to cover a theft, there must be evidence of forced or violent entry into the premises. The other options represent different insurance concepts: ‘Franchise’ relates to the deductible amount that the insured must bear before the insurer pays, ‘Fraud’ refers to dishonest acts by the insured, and ‘Fundamental Risks’ are those with potentially catastrophic loss potential that are often excluded.

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 in this specific instance, as the accident did not occur ‘in the course of’ her employment.

This question tests the understanding of how travel insurance premiums are determined. While geographical area, duration, and the number of people insured are primary factors, the concept of an ‘annual policy’ is a specific pricing structure designed for frequent travelers. This structure offers a single premium for a defined period, typically a year, covering multiple trips, rather than calculating premiums for each individual trip. Therefore, it’s a distinct pricing consideration that impacts the overall cost for a specific customer segment.

The scenario describes a situation where an insured party, after experiencing a fire loss, fails to take reasonable steps to protect the damaged property from further deterioration, such as preventing water damage to electrical components. This directly contravenes the insured’s duty to minimize loss, which is a common law obligation and often explicitly stated in policy conditions. Failing to take such reasonable care can lead to the insurer reducing the claim amount or even denying it, as the additional damage could have been prevented. Admitting liability to a third party without the insurer’s consent, failing to provide proof of loss, or not disclosing other insurances are also duties of the insured, but they are not the primary breach in this specific scenario. The core issue is the failure to mitigate further damage to the insured property.

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 private cars 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 either 20% or 30%, depending on the prior entitlement. This is a specific provision designed to offer some protection to long-term claim-free drivers, preventing a complete loss of discount after one incident. Options B, C, and D describe scenarios that are either incorrect (complete loss of NCD for any claim, or a fixed reduction regardless of prior entitlement) or not the primary outcome of a single claim with a high NCD entitlement under the step-back system.

The question tests the understanding of exclusions in pleasure craft insurance, specifically concerning the ship’s boat. According to the provided text, a ship’s boat is excluded from coverage if it is not permanently marked with the parent boat’s name. This implies that if the ship’s boat is properly marked, it would be covered under the policy. Therefore, the exclusion is conditional on the marking of the ship’s boat.

The question tests the understanding of the insured’s duty to minimize loss after a claim event, as stipulated by common law and often reinforced in policy conditions. The scenario describes a situation where a fire has damaged a commercial property. The insured’s responsibility is to take reasonable steps to prevent further damage or deterioration of the affected property. This includes actions like protecting undamaged goods from smoke and water damage, securing the premises against further intrusion, and taking measures to prevent the spread of fire or secondary damage. Option A correctly identifies the duty to protect undamaged inventory from smoke and water, which is a direct application of the duty to minimize loss. Option B is incorrect because while reporting the loss is a duty, it doesn’t directly address minimizing the *extent* of the damage. Option C is incorrect as the insured’s primary duty is to mitigate further loss, not to immediately dispose of damaged goods without insurer consent. Option D is incorrect because while cooperation is a duty, the specific action described (providing a detailed inventory of damaged items) is part of proving the claim’s quantum, not the immediate mitigation of further loss.