Paper 2 General Insurance Quiz 34

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 the policy’s basis to ensure continuous protection after leaving a company, a key consideration for directors.

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 encompass sports played on snow or ice, regardless of the season or whether they are indoors or outdoors. Therefore, ice-skating, even indoors, falls under this broad interpretation of winter sports. The policy’s exclusion of losses caused by or related to participating in winter sports would therefore apply, leading to the rejection of the claim. This aligns with the principle that specific exclusions in insurance policies are interpreted based on their common understanding and the insurer’s reasonable interpretation, especially when a precise definition is not provided in the policy itself, as long as it’s not demonstrably unreasonable.

An insurance broker acts as an agent for the proposer, meaning they are legally identified with the client. This agency relationship imposes a duty of utmost good faith. If a broker withholds or misrepresents material facts, this breach of good faith is attributed to the proposer. This can lead to the insurer voiding the contract because the underwriting decision was based on incomplete or inaccurate information. Therefore, the broker’s actions directly impact the validity of the insurance contract from the proposer’s perspective.

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. If the material damage policy does not cover the event causing the interruption, or if it’s invalid, the BI claim will not be admitted. Therefore, the absence of a valid material damage cover for the physical loss directly invalidates the business interruption claim.

The Code of Conduct for Insurers in Hong Kong is designed to promote good insurance practice and protect policyholders. It addresses various aspects of an insurer’s operations to ensure fair treatment and transparency. Specifically, the Code covers the insurer’s responsibilities towards customers, including their rights and interests, and also sets standards for underwriting and claims handling processes. While an insurer’s public image as a corporate citizen is important, the Code’s primary focus is on the direct conduct of insurance business and the protection of policyholders’ interests, rather than broader corporate social responsibility initiatives.

The scenario describes a situation where the insured experienced a loss (damaged watch) and took action to mitigate it by sending it for repair. However, the claim was lodged only after the repair was completed and the watch was collected, which was two weeks after the incident. The provided text (3.1.3 (a) Notification to the insurer) emphasizes that instructions are always given regarding the manner in which notice of a possible claim should be given, and Case 15 specifically states that notification is required ‘as soon as possible’. Lodging the claim two weeks after the incident, even though the repair was done, likely constitutes a delay in notification, potentially impacting the claim’s validity according to the policy’s conditions. The insurer would need to assess if this delay prejudiced their ability to investigate the loss or if it breached an express term of the policy regarding timely notification.

A voluntary excess, also known as a ‘self-insured retention’ or ‘excess requested by the insured’, is an amount that the policyholder agrees to bear themselves in the event of a claim. This is typically offered by insurers as a way to reduce the premium. The insured chooses a higher excess amount in exchange for a lower premium. This voluntary excess is in addition to any compulsory excess that might apply to the policy, such as a young driver excess or a deductible for specific types of claims. Therefore, if a policy has both a voluntary excess and a young driver excess, both would apply to a claim made by a young driver.

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, such as a mechanical digger being used for excavation. This exclusion is a key differentiator for commercial vehicle insurance and is mandated by statutory provisions regarding compulsory insurance, meaning it applies unless the law requires otherwise for compulsory cover. Food poisoning claims and damage to stock-in-trade are also specific exclusions for certain commercial uses, and damage to roads due to vehicle weight is another distinct exclusion. Therefore, the use of a vehicle as a tool of trade, unless statutorily mandated for compulsory insurance, is a primary exclusion.

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 by establishing robust internal controls and oversight for employees entrusted with financial responsibilities. Option B is incorrect because while audits are part of a system of check, they are typically retrospective rather than the primary mechanism for ongoing internal discipline. Option C is incorrect as external regulatory oversight, while important, is not the core of an employer’s internal system of check. Option D is incorrect because simply having a fidelity guarantee insurance policy does not constitute the employer’s internal system of check; it’s a risk transfer mechanism.

This question tests the understanding of ‘System of Check’ in fidelity guarantee insurance. This system refers to the internal controls and discipline an employer implements for their guaranteed staff. Option (a) accurately describes this concept. Option (b) relates to ‘Target Risks,’ which are typically large, hazardous risks in general insurance, not directly tied to internal controls for fidelity. Option (c) describes ‘Temporary Disablement’ benefits in personal accident insurance, which is unrelated. Option (d) refers to ‘Theft Insurance’ and its requirements for evidence of forcible entry, which is a different type of insurance and a different concept.

A ‘Condition Precedent to the Contract’ is a term that must be fulfilled for the insurance agreement to become effective. Failure to meet this condition means the contract never legally begins. In contrast, a ‘Condition Precedent to Liability’ relates to a term whose breach invalidates a specific claim, but the contract itself may still be in force. A ‘Condition Subsequent to the Contract’ is a term that must be adhered to during the policy’s currency, but its breach does not necessarily invalidate the entire contract, only potentially affecting claims arising after the breach. ‘Consequential Loss’ refers to indirect financial losses resulting from an insured event, which are typically excluded from property insurance unless specifically covered under a business interruption policy.

This question tests the understanding of the ‘claims-made’ basis for liability insurance. Under a claims-made policy, coverage is triggered by the date the claim is first made against the insured, not the date the incident occurred. Therefore, for a claim to be admissible, it must be made during the policy period or within a specified extended reporting period after the policy has expired, provided the incident occurred during the policy’s retroactive date (if applicable). Options B and C are incorrect because claims made before the policy began are not covered, and settlement date is generally irrelevant to the trigger of coverage, which is the making of the claim.

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 (including fraud) is a direct manifestation, carelessness, unreasonableness (like inflexibility or opinionated views that create problems), and negative social behaviour (such as vandalism) are also considered forms of moral hazard. These behaviours, even if not outright fraudulent, can significantly increase the probability or severity of a claim, thereby impacting the insurer. Therefore, all listed behaviours can contribute to moral hazard.

The question probes the understanding of the ethical implications of rebating in the context of insurance sales, specifically how it can be construed as a form of bribery or corruption. Rebating, which involves offering a portion of the commission back to the policyholder, fundamentally distorts the pricing and underwriting process. It undermines the principle of fair compensation for the intermediary and can lead to the selection of less suitable risks based on the rebate offered rather than the policy’s merits. This practice is explicitly prohibited by 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 integrity of the insurance transaction and can be seen as an inducement to secure business unfairly. Therefore, rebating is considered unethical and potentially corrupt because it corrupts the basis of fair reward and honest dealing.

The scenario describes a situation where an insurer is determining the premium for a motor insurance policy. The insurer needs to consider various factors that influence the likelihood and potential cost of a claim. ‘Rating Features’ are precisely these elements used to calculate premiums. For motor insurance, these typically include the scope of coverage, the vehicle’s engine capacity, its intended use, and its value, all of which directly impact the risk profile. ‘Risk Classification’ groups similar risks, but the specific factors used within that classification are the rating features. ‘Risk Discrimination’ involves differentiating within a category, which is a consequence of applying rating features. ‘Public Policy’ is a broad legal concept related to societal welfare and is not directly involved in the technical calculation of insurance premiums.

The scenario describes a situation where an insured person sustained an injury and received a sick leave period. The insurer paid benefits for temporary total disability for a portion of the leave and temporary partial disability for the remainder. The insured disputed this, believing they should receive temporary total disability benefits for the entire period. The Complaints Panel’s decision, as outlined in the provided text, hinges on the distinction between temporary total and temporary partial disability. The panel determined that based on 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, the insured was capable of performing some duties after eight days. This capability to perform some, but not all, duties aligns with the definition of temporary partial disability, not temporary total disability, for the latter part of the sick leave. Therefore, the insurer’s classification and payment structure were deemed appropriate according to the policy’s definitions.

The Motor Vehicles Insurance (Third Party Risks) Ordinance mandates compulsory third-party liability insurance for motor vehicles in Hong Kong. This ordinance ensures that victims of motor accidents have a recourse for compensation, even if the at-fault driver is uninsured or unable to pay. 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 not available or effective, funded by a levy on motor insurance premiums. Therefore, understanding the foundational legislation for compulsory motor insurance is key to grasping the MIB’s function.

A voluntary excess, also known as a ‘self-insured retention’ or ‘excess requested by the insured’, is an amount that the policyholder agrees to bear themselves in the event of a claim. This is typically offered by insurers as an incentive for the policyholder to take on a portion of the risk, usually in exchange for a reduction in the premium. This voluntary excess is in addition to any other excesses that might be applicable under the policy, such as a compulsory excess or a young driver excess. Therefore, the primary purpose of a voluntary excess is to reduce the overall premium paid by the insured.

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, such as a mechanical digger being used for excavation. This exclusion is a key differentiator for commercial vehicle insurance and is mandated by statutory provisions regarding compulsory insurance, meaning it applies unless the law requires otherwise for compulsory third-party cover. Food poisoning claims and damage to stock-in-trade are also specific exclusions for certain commercial uses, and damage to roads due to vehicle weight is another distinct exclusion. Therefore, the use of a vehicle as a tool of trade, unless statutorily mandated for compulsory insurance, is a primary exclusion.

The Employees’ Compensation Ordinance (ECO) mandates that employers must provide compensation for injuries or deaths sustained by employees arising out of and in the course of employment. While the ECO provides a statutory framework for compensation, employers can also be liable under common law for negligence or breach of statutory duty related to workplace safety. Employees’ Compensation Insurance (ECI) policies typically cover both liabilities. However, the question specifies a scenario where an employer’s claim was rejected because the injury did not arise out of and in the course of employment, which is a fundamental condition for coverage under the ECO. Therefore, the insurer’s rejection is based on the policy’s intent to cover only liabilities stemming from the employment relationship as defined by the ECO, and not general liabilities unrelated to employment.

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.

Institute Cargo Clauses (ICC) (A) provides the broadest coverage for own damage, operating on an ‘All Risks’ basis. This means it covers all perils except those specifically excluded. ICC (B) and ICC (C) are more restrictive, covering only specified risks. Banks often require ICC (A) for cargo shipments when providing financing or guarantees because its comprehensive nature offers greater protection against unforeseen events, aligning with their need for robust security.

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 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 identified would lead to its inclusion in the claim settlement.

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 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. 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 consequence of a single claim with a high NCD entitlement.

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 rights and interests of customers, ensuring they are treated fairly and their needs are met. This includes aspects of underwriting and claims handling, as these are direct interactions where customer rights are exercised and interests are paramount. Furthermore, the Code emphasizes the industry’s responsibility towards its public image, encouraging insurers to act as responsible corporate citizens. Therefore, all four listed areas fall within the purview of the Code of Conduct.

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.

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 and 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.

This question tests the understanding of the specific definition of ‘loss of one limb’ within the context of personal accident insurance, as illustrated by Case 12. The scenario highlights that a fracture causing functional impairment, but not physical severance or total functional disablement as defined in the policy, would not qualify for the ‘loss of one limb’ benefit. The policy’s definition is precise, and partial functional loss without meeting the ‘total functional disablement’ threshold or physical severance is not covered under this specific benefit. Therefore, the insurer’s rejection of the claim for partial disablement is consistent with the policy’s terms.

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.