Paper 2 General Insurance Quiz 33

A cover note serves as a temporary confirmation of insurance coverage, binding the insurer from the outset. It is not contingent on the submission of a complete proposal form, although it may have cancellation clauses. Its primary function is to provide immediate documentary evidence of insurance, often used for legal requirements like vehicle registration or to satisfy third-party demands such as a bank’s requirement for fire insurance before approving a loan. While it is a temporary measure, it can be extended or replaced by a formal policy.

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 ‘claims-made’ basis for Directors and Officers (D&O) liability insurance, as outlined in the provided syllabus. A ‘claims-made’ policy covers claims that are made against the insured *during* the policy period, regardless of when the wrongful act occurred. This means that for an event to be covered, the claim must be reported to the insurer within the policy term. The scenario describes a situation where a director is concerned about coverage after leaving a company. Under a claims-made policy, the director would need to ensure that any potential claims arising from their tenure are reported to the insurer while the policy is still in effect or that appropriate ‘tail coverage’ or ‘extended reporting period’ is secured. Option (a) correctly identifies that the policy must be active when the claim is *made* and reported, which is the fundamental principle of claims-made coverage. Option (b) describes an ‘occurrence’ basis, where coverage is triggered by the date of the wrongful act, not when the claim is made. Option (c) is incorrect because while retroactive cover might be granted, the primary trigger for a claims-made policy is the claim’s reporting date. Option (d) is also incorrect as it misrepresents the core mechanism of claims-made coverage by focusing on the act itself rather than the claim notification.

This question tests the understanding of the specific definitions used in Personal Accident (PA) cover within travel insurance, as illustrated by Case 12. The scenario highlights that a claim for ‘loss of one limb’ requires physical severance or total functional disablement as defined in the policy. Partial functional loss, even if causing significant inconvenience, does not meet this strict definition unless the policy explicitly includes provisions for proportional compensation for such partial disabilities. Therefore, the insurer’s rejection of the claim for partial disablement of the hand, based on the policy’s definition of ‘loss of one limb’ and the absence of specific clauses for partial loss, is consistent with the policy terms.

This question tests the understanding of the legal implications of policy renewals in Hong Kong. Statement (i) is correct because the duty of utmost good faith, which is fundamental to insurance contracts, is a continuous obligation and is particularly important at renewal when new information may be presented or circumstances may have changed. Statement (ii) is also correct as a renewal is generally considered the creation of a new contract, even if the terms are similar to the previous policy, because it establishes a new period of coverage. Statement (iv) is true 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 incorrect because while terms can be negotiated, they are not always freely negotiable, especially if the insurer offers a standard renewal terms based on the existing policy and the insured’s risk profile. The insurer may also have specific renewal conditions that are not open for negotiation.

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 before applying for insurance, and the insurer believed the colon tumor could not have developed within 10 days of policy inception. The Complaints Panel, considering the tumor size, agreed that it likely took time to grow, and since the policy excluded illnesses presenting signs or symptoms prior to commencement, the insurer’s decision was upheld. This aligns with the principle that insurance policies typically exclude coverage for conditions that were already present or manifesting before the policy’s effective date, even if not formally diagnosed. The difficulty in pinpointing the exact onset date is a common challenge in applying pre-existing condition clauses, but the evidence of prior symptoms and the tumor’s likely growth period supported the insurer’s stance.

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 before applying for insurance, and the insurer believed the colon tumor could not have developed within 10 days of policy inception. The Complaints Panel, considering the tumor size, agreed that it likely took time to grow, and since the policy excluded illnesses presenting signs or symptoms prior to commencement, the insurer’s decision was upheld. This aligns with the principle that insurance policies typically exclude coverage for conditions that were already present or manifesting before the policy’s effective date, even if not formally diagnosed. The difficulty in ascertaining the exact onset date is a common challenge in applying such exclusions, but the evidence of prior symptoms and the tumor’s likely growth period supported the insurer’s stance.

This question tests the understanding of the core principle of ‘All Risks’ insurance, which is that it covers all losses unless specifically excluded. The insurer bears the burden of proving that an exclusion applies. Option (b) is incorrect because while exclusions exist, the fundamental principle is broad coverage. Option (c) misrepresents the burden of proof, suggesting the insured must prove coverage. Option (d) is incorrect as ‘All Risks’ does not imply coverage for every conceivable event, but rather a broad scope subject to defined exclusions.

The Insurance Claims Complaints Bureau (ICCB) is designed to handle disputes related to personal insurance claims. It has a jurisdictional limit of HK$800,000 for the value of the claim. Complaints exceeding this amount, or those arising from commercial, industrial, or third-party insurance, fall outside the ICCB’s purview and must be resolved through other means such as litigation or arbitration. Therefore, a dispute involving a commercial property insurance claim, regardless of its monetary value, would not be handled by the ICCB.

This question tests the understanding of the ‘claims-made’ basis for liability insurance, a concept crucial for understanding how coverage is triggered. Under a claims-made policy, the policy in effect at the time the claim is *reported* or *made* is the one that responds, not necessarily the policy in effect when the incident occurred. This contrasts with ‘occurrence-based’ policies. Therefore, for a claim to be admissible, it must be made during the policy period or within a specified extended reporting period (tail coverage) after the policy expires, provided the incident occurred after the retroactive date. Option (a) describes an occurrence-based trigger. Option (b) is incorrect as claims made before the policy began are not covered. Option (c) describes a cash basis settlement, which is not the primary trigger for claims-made coverage.

This question tests the understanding of exclusions in a Professional Indemnity (PI) policy. PI policies are designed to cover financial losses arising from professional negligence. However, they typically exclude liability stemming from dishonest or fraudulent acts by the insured professional. This is because the policy is meant to cover errors in judgment or execution, not intentional wrongdoing. While other options might be covered under different types of insurance or have specific endorsements, dishonesty is a fundamental exclusion in PI insurance as it represents a breach of professional ethics and is not an insurable risk in the context of professional indemnity.

The question tests the understanding of which vessels are subject to registration in Hong Kong under the relevant legislation. Option (a) correctly identifies vessels employed in sea fishing that regularly operate within Hong Kong waters or use them as a base. This aligns with the scope of vessels requiring registration as outlined in the provided text, which includes vessels employed in sea fishing plying regularly in Hong Kong waters or using them as a base. Option (b) is incorrect because vessels registered outside Hong Kong and trading to or from Hong Kong are generally covered by the registration requirements. Option (c) is incorrect as pleasure vessels used in Hong Kong waters are also subject to registration. Option (d) is incorrect because vessels registered in Mainland China or Macau that trade to Hong Kong and possess specific certificates are treated differently and may not require Hong Kong registration under all circumstances, depending on the nature of the certificate.

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.

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 is also a significant contributor. Unreasonableness, though not necessarily dishonest, can lead to poor risk management. Social behaviour, while impacting society, is a broader concept that can indirectly influence insured risks. The question asks for a manifestation of moral hazard that is not necessarily fraud. Carelessness directly increases the probability of a loss due to the insured’s actions or inactions, fitting this description.

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 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 encompass other specific liabilities like Directors’ and Officers’ Liability or Professional Liability, depending on the client’s unique needs. The key characteristic is the integration of multiple liability types, not necessarily the inclusion of property or pecuniary risks, which are distinct insurance categories.

In Hong Kong, when a general insurance policy is up for renewal, several principles apply. Firstly, the duty of utmost good faith is a continuous obligation, and it is generally understood to ‘revive’ at renewal, meaning the insured must disclose any material changes since the last renewal. Secondly, each renewal is typically considered the creation of a new contract, rather than a mere continuation of the old one. This is because the terms, premium, and risk assessment are re-evaluated. Thirdly, while parties are free to negotiate terms, the insurer is not obligated to renew the policy, and if they choose not to, they are generally required by good practice and often by regulatory guidelines (though not always a strict legal mandate for all policy types) to inform the insured. However, the statement that terms are ‘freely negotiable’ is the least accurate as insurers often have standard renewal terms and conditions, and the insured’s ability to negotiate significant changes might be limited depending on the policy and insurer’s practices. The most accurate statements reflecting common practice and legal understanding in Hong Kong are that the duty of utmost good faith revives, renewal constitutes a new contract, and insurers should inform the insured if they do not intend to renew.

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.

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 represents the final, comprehensive agreement. A certificate of insurance, particularly for compulsory insurance, serves as proof of coverage but is a separate document from the policy and not necessarily a temporary measure like a cover note.

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 from the general coverage. This allows the insurer to offer coverage for the standard risks while mitigating losses from the identified higher risk, rather than declining the entire policy. Options B, C, and D describe different types of exclusions or policy adjustments that do not directly address the scenario of underwriting a standard risk with a specific, manageable exception.

The scenario highlights the importance of timely notification of potential claims. While the insured reported the damage within 20 days, the insurer argued this was not ‘as soon as reasonably possible’ because the repair had already been completed, hindering the investigation. The Complaints Panel, however, considered the layman’s perspective and the simplicity of the case, ultimately giving the insured the benefit of the doubt. This implies that the interpretation of ‘as soon as reasonably possible’ can be flexible and context-dependent, especially when the delay does not demonstrably prejudice the insurer’s ability to assess the claim’s validity or extent. The key takeaway is that while prompt reporting is crucial, a minor delay might be excused if the insurer’s position isn’t significantly compromised and the claim is otherwise genuine. The insurer’s rejection based solely on the timing, without proving prejudice, was not upheld in this instance by the Complaints Panel.

The Employees’ Compensation Assistance Scheme (ECAS) is designed to provide a safety net when compulsory employees’ compensation insurance is absent or ineffective. It is funded partly by a levy on insurance premiums. This scheme acts as a fallback mechanism to ensure that employees who suffer work-related injuries or diseases can still receive compensation, even if their employer has failed to secure the legally mandated insurance coverage. Therefore, its primary purpose is to bridge the gap created by the ineffectiveness or non-existence of the compulsory insurance.

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 the material damage policy is voided due to a breach of policy conditions by the insured, the BI policy would also be invalidated for claims stemming from that event, as the prerequisite for a valid material damage claim would not be met.

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 event. Without physical damage covered by the material damage policy, the BI policy will not respond to losses arising from the interruption. Therefore, if the material damage policy is voided due to a breach of its terms, the BI policy’s coverage is also invalidated for that event.

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 require, making option (a) the most comprehensive and accurate description of what such a policy might encompass beyond the core 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.

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.

The Insurance Claims Complaints Bureau (ICCB) is designed to handle disputes related to personal insurance claims. It has a jurisdictional limit of HK$800,000 for the value of the claim. Complaints exceeding this amount, or those arising from commercial, industrial, or third-party insurance, fall outside the ICCB’s purview and must be resolved through other means such as litigation or arbitration. Therefore, a dispute involving a commercial property insurance claim, regardless of its monetary value, would not be handled by the ICCB.

This question tests the understanding of the core principle of ‘All Risks’ insurance, which is that it covers all losses unless specifically excluded. The insurer bears the burden of proof to demonstrate that an exclusion applies. Option (b) is incorrect because while exclusions exist, the fundamental principle is broad coverage. Option (c) is incorrect as it misrepresents the burden of proof. Option (d) is incorrect because ‘all risks’ does not imply coverage for every conceivable event, but rather a wide scope subject to defined exclusions.

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. Option (a) correctly identifies the commitment to quality and service as a fundamental element. Option (b) refers to professional standards, option (c) to efficiency and ethics, and option (d) to claims handling, all of which are also common inclusions. However, the question asks for a commitment that is *most* likely to be a foundational element of such a declaration, and a broad commitment to quality and service underpins the others. The provided text emphasizes that these declarations are about declared intentions and performance measures, with quality and service being the overarching themes.