Paper 2 General Insurance Quiz 32

A combined liability policy is designed to consolidate various liability coverages into a single document for convenience and potential premium savings. While it typically includes Public Liability, Products Liability, and Employees’ Compensation Liability, it can be extended to include other specific liability covers based on client needs. Directors’ and Officers’ Liability and Professional Liability are common additions that clients might request to be integrated into such a combined policy, reflecting a broader risk management approach.

The scenario highlights the importance of the insured’s duty to notify the insurer of a potential claim as soon as reasonably possible. While the insured in the first case lodged the claim within 20 days, the repair had already been completed, hindering the insurer’s ability to investigate the cause and extent of the damage. The Complaints Panel acknowledged this prejudice. However, they ultimately ruled in favour of the insured, considering the layman’s perspective on ‘reasonably possible’ and the lack of a poor claims history. This suggests that while prejudice is a factor, the interpretation of the notification clause and the specific circumstances can influence the outcome. The second case, however, clearly shows a breach of a specific 30-day notification period, with the insured’s belief about the start of the period being deemed unreasonable and the prior claim settlement not setting a precedent. The prejudice to the insurer was also explicitly noted. Therefore, the core principle tested is the interpretation and application of the ‘as soon as reasonably possible’ or specific time-limit notification clauses, and how prejudice to the insurer is assessed in different contexts, with the first case demonstrating a more lenient interpretation due to specific circumstances and the second case a stricter adherence to policy terms.

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 claim amount or the policyholder’s responsibility. 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 agreed excess.

This question tests the understanding of the ‘Loss of Deposits’ cover within travel insurance, as outlined in section 1.3.3 (iv) of the provided syllabus material. The scenario describes a situation where a pre-paid holiday becomes unusable due to the unforeseen illness of the insured’s spouse. The ‘Loss of Deposits’ cover is specifically designed to reimburse such non-refundable payments when the holiday cannot be taken due to specific, often personal, circumstances like illness or death of the insured or a close relative. Option B is incorrect because while luggage loss is covered, it’s not the primary concern in this scenario. Option C is incorrect as ‘Delays’ cover relates to travel disruptions, not the inability to travel due to personal circumstances. Option D is incorrect because ‘Repatriation expenses’ are for returning the insured or their remains, which is irrelevant here.

The scenario describes a situation where an insured individual suffered a back injury and received medical treatment. The insurer initially paid Temporary Total Disability (TTD) benefits. However, based on a medical examiner’s report indicating improved trunk movement, the insurer reclassified the benefits to Temporary Partial Disability (TPD) from a specific date. The core of the dispute lies in determining whether the insured was still unable to perform *any* work (TTD) or could perform *some* duties (TPD). The Complaints Panel, in this case, gave more weight to the attending doctors’ opinions, who stated the insured was unable to perform *any* work until a later date. This aligns with the principle that TTD benefits are typically paid when an insured is completely unable to perform their usual occupation, while TPD applies when they can perform some, but not all, of their duties. The insurer’s decision to unilaterally change the benefit classification based on a single medical opinion, without fully considering the attending physicians’ assessments, was deemed less persuasive by the panel. Therefore, the insured was entitled to continue receiving TTD benefits as per the attending doctors’ assessment.

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. While all the options represent potential elements of such a declaration, the prompt specifically asks for what is *very likely* to be included. Commitments to quality and service, dedication to professional standards, efficiency and ethics, and fair claims handling are fundamental promises that insurers make to build trust and meet regulatory expectations. Specific information on business conduct and practices, while important, is often a more detailed elaboration of the broader commitments rather than a primary, overarching promise in the initial declaration. Therefore, the first four points are more universally expected as core declarations.

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. However, for partial losses, the principle of strict indemnity applies, meaning the payout will be based on the actual loss incurred, not the agreed value. This is a key characteristic of agreed value policies for high-value, unique items where market value can fluctuate significantly or be difficult to ascertain.

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, the broker’s actions directly impact the validity of the insurance contract from the proposer’s perspective.

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 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, they are not the common practice for PL insurance. Therefore, a policy that covers claims reported within the policy period, even if the incident occurred earlier, would be a “claims-made” basis, which is not the typical structure for PL insurance.

A General Average Act is defined as an extraordinary sacrifice or expenditure voluntarily and reasonably made or incurred in time of peril to preserve 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 a voluntary and reasonable sacrifice made to save the entire maritime adventure. This action directly aligns with the definition of a General Average Act, as it involves an extraordinary sacrifice for the common safety of the ship and all its cargo. The other options do not fit the definition: ‘salvage’ refers to saving property from peril for an award, ‘sue and labour’ involves expenses to preserve or minimize loss to the insured property, and ‘actual total loss’ describes the complete destruction or irretrievable loss of the insured subject matter.

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 a less vigilant or cooperative attitude towards risk management. Social behaviour, while seemingly detached from the insured asset, can indirectly lead to losses through damage or disruption.

The Employees’ Compensation Assistance Scheme (ECAS) is designed to provide a safety net when an employer’s compulsory employees’ compensation insurance is absent or ineffective. It is funded partly by a levy on insurance premiums. Therefore, if an employer fails to secure the mandatory insurance, the ECAS steps in to ensure employees receive compensation for work-related injuries or diseases, fulfilling the spirit of the compulsory insurance requirement.

Moral hazard refers to the increased likelihood of a loss occurring because an individual is insured. It’s often linked to the ‘human element’ of risk, encompassing attitudes and behaviours. While dishonesty and fraud are extreme forms, carelessness and unreasonableness also contribute. Unreasonableness, in this context, means an insured person, despite being honest, might cause significant problems due to rigid or opinionated viewpoints, which can lead to losses or complications that an insurer would have to cover. Vandalism and social disturbances fall under social behaviour, another facet of moral hazard.

The question tests the understanding of the ‘claims-made’ basis for Directors and Officers (D&O) liability insurance. Under a claims-made policy, coverage is triggered by a claim being made against the insured during the policy period, regardless of when the wrongful act occurred. This contrasts with ‘claims-occurring’ policies, where the event causing the claim must have happened during the policy period. Therefore, for an individual director to maintain coverage after leaving a company, they must ensure that any potential claims arising from their tenure are reported to the insurer while the policy is still in force or that appropriate ‘tail coverage’ or ‘extended reporting period’ is secured. The scenario highlights the importance of understanding this basis of cover for personal protection after employment termination.

Institute Cargo Clauses (ICC) (A) provides the broadest coverage for own damage on an ‘All Risks’ basis. This means it covers all perils except those specifically excluded. ICC (B) and ICC (C) offer coverage on a ‘specified risks’ basis, meaning only the listed perils are covered. Therefore, if a loss occurs due to a peril not explicitly listed in ICC (B) or ICC (C), it would not be covered under those clauses, whereas it would be covered under ICC (A) unless it falls under a specific exclusion. The scenario describes a loss that is not a ‘specified major casualty’ or one of the other perils listed for ICC (B) and (C), making ICC (A) the appropriate choice for comprehensive own damage protection.

Institute Cargo Clauses (ICC) (A) provides the broadest ‘all risks’ coverage for own damage to cargo. ICC (B) covers specified risks, including major casualties like fire, stranding, sinking, and collision, along with other perils such as earthquake, volcanic eruption, lightning, discharge of cargo at a port of distress, jettison, washing overboard, and water ingress. ICC (C) offers the most limited coverage, primarily for General Average sacrifice, jettison, fire, stranding, sinking, collision, and discharge of cargo at a port of distress. The scenario describes a cargo shipment damaged by a collision. Under ICC (A), this would be covered as an ‘all risks’ peril. Under ICC (B), collision is a specifically listed peril, so it would also be covered. However, ICC (C) does not explicitly list collision as a covered peril for own damage, only for General Average sacrifice. Therefore, the most limited coverage that would still cover damage from a collision is ICC (B).

This question tests the understanding of ‘System of Check’ in fidelity guarantee insurance, which is crucial for internal discipline and control within an employer’s operations. The correct answer highlights the proactive measures an employer takes to prevent losses from employee dishonesty. Option B is incorrect because while reporting is part of a system, it’s not the primary focus of the ‘System of Check’ itself, which is about preventative controls. Option C is incorrect as it describes a reactive measure (investigation) rather than a preventative system. Option D is incorrect because while background checks are important, the ‘System of Check’ encompasses a broader range of ongoing internal controls and procedures designed to mitigate fidelity risks.

A warranty in insurance is an absolute undertaking by the insured to the insurer. A breach of this undertaking, regardless of its impact on the claim, can automatically discharge the insurer’s liability from the date of the breach. However, insurers in Hong Kong have provided an undertaking to the Hong Kong Federation of Insurers that they will only refuse a claim due to a breach of warranty if there is a causal connection between the breach and the loss, or if the breach is fraudulent. This means that a breach without a causal link or fraud would not typically lead to a claim refusal under this undertaking.

The scenario describes a situation where an insurer might exclude coverage for a specific pre-existing condition, such as a slipped disc, from a personal accident policy. This is a common practice where the insurer accepts the general risk profile of the applicant but wishes to avoid covering a known, specific vulnerability. This is achieved through a specially worded exclusion clause within the policy document. Options B, C, and D describe different types of exclusions or policy adjustments that are not directly applicable to this specific situation of tailoring coverage for an individual’s known medical issue within a personal accident policy.

The question tests the understanding of the ‘claims-made’ basis for Directors and Officers (D&O) liability insurance. Under a claims-made policy, coverage is triggered by a claim being made against the insured during the policy period, regardless of when the wrongful act occurred. This contrasts with an ‘occurrence’ basis, where coverage is triggered by the event causing the loss happening during the policy period. Therefore, if a director leaves a company, they need to consider how to maintain coverage for potential future claims arising from their past actions. This is often achieved through ‘tail coverage’ or ensuring the policy has a sufficient retroactive date. The scenario highlights the importance of understanding this policy trigger for individual directors’ long-term protection, especially when considering career transitions or company changes.

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 trying to establish coverage. If the policy is ‘Specified Perils’, the claimant must demonstrate the loss was caused by a peril listed in the policy. If it’s ‘All Risks’, the claimant only needs to show an accidental loss occurred, and the insurer must prove an exclusion applies. Therefore, the claimant’s ability to prove the cause of loss is directly tied to the type of cover.

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 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 question tests the understanding of the specific limitations of third-party liability cover in Hong Kong motor insurance, particularly concerning passenger injury. While the Motor Vehicles Insurance (Third Party Risks) Ordinance mandates cover for passenger injury, the provided text explicitly states that for motor cycles, it is not usual to grant cover for the liability of passengers. This is a key distinction from private car policies where such cover is typically included. Therefore, a policy that only provides third-party cover for a motor cycle would not typically include passenger liability.

The question tests the understanding of the definition of ‘theft’ under a typical theft insurance policy, specifically the requirement for forcible and violent entry or exit. Option (a) correctly states this requirement. Option (b) is incorrect because while damage caused by thieves during entry/exit is covered, the policy doesn’t typically cover damage from other causes like vandalism without theft. Option (c) is incorrect because theft by staff is generally excluded and falls under fidelity guarantee insurance. Option (d) is incorrect because fire damage, even if related to a theft, is usually excluded from a theft policy and covered under a fire policy.

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 concerning industrial safety. This common law liability is also covered by ECI policies. The question asks about the basis of premium calculation for ECI. The provided text states that the premium is usually a rate per cent or per mille applied to the annual payroll, and that the initial premium is provisional, subject to adjustment based on final payroll figures. Therefore, the annual payroll is the fundamental basis for calculating the premium.

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 or violent entry into or exit from the premises. The other options represent different insurance concepts: ‘Franchise’ relates to the deductible amount that applies to claims, ‘Fraud’ concerns dishonest acts by the insured, and ‘Fundamental Risks’ are those with potentially catastrophic loss potential that are often excluded.

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 scenario where the ship’s boat is properly marked would lead to a claim being accepted for damage to it, assuming the damage is caused by a covered peril.

The question tests the understanding of the core principle of ‘All Risks’ insurance, which is that it covers all losses or damages unless specifically excluded. The insurer bears the burden of proving that an exclusion applies. Option (a) accurately reflects this principle by stating that the insurer must demonstrate the applicability of an exclusion to deny a claim. Option (b) is incorrect because ‘All Risks’ does not inherently mean no exclusions exist. Option (c) is incorrect as the insured does not need to prove the loss was not excluded; the insurer must prove the opposite. Option (d) is incorrect because while the scope is wide, it is not unlimited and is defined by the exclusions.

The question probes the understanding of the ethical implications of rebating in the context of insurance sales, specifically how it can be construed as bribery or corruption. Rebating, which involves offering a portion of the commission or premium back to the policyholder, fundamentally distorts the principle of fair pricing and compensation. When this practice is extended to employees of the insured entity without proper authorization, it can be seen as an inducement to secure business, thereby undermining the integrity of the insurance transaction. This practice is explicitly prohibited under regulations like the Code of Practice for the Administration of Insurance Agents and the minimum requirements of the Model Agency Agreement, as it compromises the honest establishment of rewards for intermediaries and can lead to unfair competition and potentially fraudulent activities. Therefore, rebating, especially when directed towards employees of the insured without consent, is considered a form of corruption because it involves offering undue benefits to influence business decisions.