Paper 2 General Insurance Quiz 35

Moral hazard refers to the increased likelihood of an insured event occurring due to the presence of insurance, often stemming from a change in the insured’s behaviour. This change can manifest as dishonesty (including fraud), carelessness leading to losses, unreasonableness in decision-making, or negative social behaviour. The question asks to identify the core concept that encompasses these behavioural aspects, which is precisely what moral hazard represents in insurance. While ‘adverse selection’ deals with pre-contractual information asymmetry, and ‘proximate cause’ relates to the direct cause of a loss, and ‘insurable interest’ is a prerequisite for a valid policy, moral hazard specifically addresses the post-contractual behavioural changes that can increase risk.

The Code of Conduct for Insurers, established by the Hong Kong Federation of Insurers (HKFI), specifically addresses the expected standards of good insurance practice for personal insurance policies sold to individual policyholders residing in Hong Kong. It covers a broad range of areas including underwriting, claims handling, product understanding, customer rights, and advising/selling practices. While the Insurance Companies Ordinance (ICO) sets out foundational requirements for insurers’ authorization, capital, and solvency, and the Code of Practice for the Administration of Insurance Agents details intermediary conduct, the Code of Conduct for Insurers is the primary document outlining the industry’s self-regulatory standards for direct interactions with policyholders on the quality of service and practice.

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 situation where an insured person’s ability to perform their usual occupation is partially restored, but not fully. The insurer’s decision to classify the latter part of the recovery period as Temporary Partial Disablement (TPD) is based on the medical assessment that the insured could perform some duties. This aligns with the principle that TPD benefits are applicable when an individual can undertake certain tasks related to their occupation, even if not all of them, whereas Temporary Total Disablement (TTD) applies when the insured is completely unable to perform any work. The Complaints Panel’s decision in Case 2, which favored the attending doctors’ opinion that the insured was still unable to perform *any* work, highlights the importance of the medical assessment of the insured’s capacity to resume their occupation. In Case 3, the panel agreed with the insurer’s TPD classification because the insured’s condition had improved sufficiently to allow them to perform ‘certain parts of his duties’. Therefore, the distinction between TTD and TPD hinges on the degree to which the insured’s ability to perform their usual occupation is impaired.

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. 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 negative change in risk. Option C is incorrect as a policyholder’s financial stability, while a factor in underwriting, doesn’t directly relate to the alteration of the insured risk itself. Option D is incorrect because while an insurer might seek expert advice, the core issue is the change in the risk, not the process of seeking advice.

This question tests the understanding of the distinction between ‘Specified Perils’ and ‘All Risks’ cover in property insurance, as outlined in the IIQE syllabus. ‘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 claimant is unable to identify the exact cause. Under ‘Specified Perils’ cover, this would likely result in a denied claim because the claimant cannot prove the loss was due to a named peril. However, under ‘All Risks’ cover, the claimant only needs to prove an accidental loss occurred, and the insurer would then need to prove an exclusion applies. Therefore, the ‘All Risks’ policy is more advantageous in this specific situation.

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 principle of this compulsory insurance is to provide compensation based on the occurrence of a work-related accident, not on proving the employer’s negligence.

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 liability arising from the vehicle’s use as a tool of trade, such as a mechanical digger performing its function. This exclusion is statutory in nature, meaning it applies unless overridden by compulsory insurance requirements. Food poisoning claims related to mobile food vending and damage to the vehicle’s own stock-in-trade are also specific exclusions for certain commercial uses. Damage to roads or weighbridges due to the vehicle’s weight or vibration is another distinct exclusion. Therefore, the use of a vehicle as a tool of trade, except where mandated by compulsory insurance laws, is a key exclusion.

This question tests the understanding of the duty of utmost good faith in insurance contracts, specifically concerning the disclosure of material facts. A material fact is defined as any circumstance that would influence a prudent insurer’s decision regarding premium calculation or risk acceptance. The duty to disclose these facts is a fundamental principle of insurance law, requiring the proposer to reveal all relevant information, regardless of whether specific questions are asked. Therefore, facts that impact an underwriter’s judgment on premium or acceptance are considered material.

The scenario highlights the importance of the insured’s duty to notify the insurer of a potential claim promptly. While the insured believed 20 days was reasonable and presented damaged parts, the insurer’s ability to investigate was prejudiced because the watch was already repaired. The Complaints Panel acknowledged the prejudice but considered the insured’s layman perspective and lack of prior claims history, ultimately awarding the repair cost. However, the core principle tested here is the insurer’s right to investigate. A delay that significantly hinders this investigation, even if the claim is genuine, can lead to rejection. The key takeaway from the provided text is that the contractual intention of the parties regarding the effect of a breach of the notification condition is paramount. In the second case study, the Complaints Panel explicitly stated that the delay prejudiced the insurer and endorsed the rejection, emphasizing that a prior claim settlement should not set a precedent. Therefore, the insurer’s ability to assess the claim’s validity and extent is a critical factor, and a delay that compromises this assessment can be grounds for denial, irrespective of the claim’s ultimate genuineness.

The scenario describes an individual injured while ice-skating. The insurer declined the claim based on an exclusion for ‘winter-sports’. The Complaints Panel, in interpreting this exclusion, determined 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 category. The key principle here is the interpretation of policy exclusions and the broad definition applied to terms like ‘winter-sports’ by regulatory bodies when specific definitions are absent in the policy wording. This aligns with the understanding that insurers may interpret such clauses to cover activities that are inherently associated with winter conditions, even if performed in a non-traditional setting or season.

This question tests the understanding of when a fact is considered non-material and therefore does not need to be disclosed by an insurance proposer. According to the provided text, facts that improve or decrease the risk, are common knowledge, or that the insurer is deemed to know do not need to be revealed. In this scenario, the fact that the insured has installed an advanced fire suppression system directly reduces the risk of fire. This falls under the category of facts that improve or decrease the risk, making it a non-material fact that does not require disclosure, as per section 2(b)(i). The other options represent situations where disclosure is generally required: a previous claim history (2(a)(iii)), a business that inherently involves highly flammable materials (2(a)(i)), and specific trade terms that could impact subrogation rights (2(a)(vi)).

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. This compensation typically includes 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 losses that arise from the inability to trade. It does not cover third-party liabilities, which are addressed by other types of insurance.

The scenario describes a situation where an insured individual, after a period of total disablement, shows improvement in their physical condition, allowing them to perform some, but not all, of their usual duties. This transition from being completely unable to work to being partially capable of performing work aligns with the definition of Temporary Partial Disablement. The insurer’s decision to shift the benefit from Temporary Total Disablement to Temporary Partial Disablement is based on the medical assessment that the insured’s range of movement had improved significantly, enabling them to undertake some work-related activities, even if not their full capacity. This distinction is crucial in personal accident policies, as different benefit levels apply to each type of disablement.

A fire business interruption (BI) policy is designed to compensate for financial losses incurred due to a business being interrupted by an insured peril, such as fire. A crucial condition for a BI claim to be admissible is that there must be a valid underlying material damage insurance policy in place that covers the physical damage caused by the insured peril. This is known as the material damage proviso. Without this underlying cover, the BI insurer would be exposed to claims for extended interruption periods without the corresponding physical damage being insured, which is not the intended scope of BI insurance. Therefore, if the physical damage is not covered by a valid fire insurance policy, the business interruption claim will not be accepted.

The ‘Schedule’ within a scheduled policy form is the section that uniquely identifies and details the specific risk being insured. It contains all the particular information relevant only to that individual contract, such as the policy number, the insured’s details, the sums insured, effective dates, a description of the insured item or risk, and the premium. While other parts of the policy contain standard wording applicable to all policies of that class, the Schedule is where the bespoke elements of your specific insurance agreement are recorded. The Recital Clause introduces the contract and references the proposal, the Operative Clause defines the scope of cover, and General Exceptions apply universally across the policy, but the Schedule is the repository for the unique identifiers and terms of your particular policy.

This question tests the understanding of how changes in the original circumstances of a risk can impact an insurance policy. The Insurance Companies Ordinance (Cap. 41) and related regulations govern how insurers must handle such situations. When the circumstances under which a risk was insured alter for the worse, it fundamentally changes the risk profile. Insurers have the right to review and potentially adjust policy terms or even cancel the policy if the risk becomes significantly greater than initially assessed. This is a core principle of underwriting and risk management, ensuring that the premium charged accurately reflects the exposure. Option B is incorrect because while insurers must act fairly, they are not obligated to continue coverage under significantly altered, adverse conditions without adjustment. Option C is incorrect as the focus is on the alteration of circumstances, not necessarily the insured’s intent to deceive, although that could be a separate issue. Option D is incorrect because while policy wording is important, the primary issue here is the change in the risk itself, which may necessitate changes to wording or terms.

This question tests the understanding of the legal implications of insurance 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 formation 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 entirely ‘freely’ negotiable; insurers must adhere to regulatory requirements and their own underwriting guidelines. Therefore, statements (i), (ii), and (iv) accurately reflect the principles of general insurance policy renewals.

A cover note is a temporary document that provides immediate evidence of insurance coverage, binding the insurer even before the final policy is issued. It is not conditional on the submission of a satisfactory proposal form later. While it offers unconditional cover, it typically includes cancellation provisions and is intended for a short duration, often replaced by a formal policy. Its primary function is to provide the insured with documentary proof of existing insurance, which can be crucial for various purposes, such as vehicle registration or satisfying lender requirements.

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 damage. 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 damage from a collision, which is a specified peril covered under ICC (B) and ICC (C), but not necessarily under ICC (A) as an ‘all risks’ peril unless it falls under a broader category. However, ICC (A) is the most comprehensive and would cover damage from a collision as part of its ‘all risks’ basis. The question asks which clause would cover damage from a collision. ICC (A) covers all risks, thus including collision. ICC (B) specifically lists collision as a covered peril. ICC (C) also covers collision. Therefore, all three clauses would cover damage from a collision, but ICC (A) provides the most extensive coverage for it as part of its ‘all risks’ nature. The question is phrased to test the understanding of the scope of each clause. While ICC (B) and (C) explicitly list collision, ICC (A) covers it implicitly as an ‘all risks’ policy. The most accurate answer reflecting the broadest coverage for collision damage among the options provided, and considering the typical interpretation of ‘all risks’ in marine insurance, is ICC (A). However, the provided text states that ICC (B) and (C) cover damage due to specified major casualties including collision. ICC (A) is on an ‘All Risks’ basis. Therefore, if a collision occurs, it is covered under ICC (A) as an ‘all risks’ policy. It is also covered under ICC (B) and ICC (C) as a specified peril. The question asks which clause covers damage from a collision. All three do. However, the question is likely designed to test the understanding of the hierarchy of coverage. ICC (A) is the most comprehensive. If the question implies ‘which clause *also* covers collision damage’, then ICC (B) and (C) are specific. But if it asks which clause covers it, ICC (A) is the most encompassing. Re-evaluating the provided text: ICC (B) covers own damage due to specified major casualties (fire, stranding, sinking, collision, etc.). ICC (C) covers own damage due to specified major casualties (fire, stranding, sinking, collision, etc.) and jettison, and discharge of cargo at a port of distress. ICC (A) is on an ‘All Risks’ basis. Therefore, damage from a collision is covered under all three. The question asks which clause covers damage from a collision. Since ICC (A) is ‘all risks’, it covers collision. ICC (B) and ICC (C) also explicitly list collision. The question is tricky. Let’s assume the question is asking for the most fundamental or broadest coverage. ICC (A) is the broadest. However, the explanation for ICC (B) and (C) explicitly mentions collision. The question is about damage from a collision. All three clauses cover damage from a collision. The question is poorly phrased if it expects a single best answer among the three. Let’s assume the question is testing the explicit mention of collision. ICC (B) and (C) explicitly mention collision. ICC (A) covers it as part of ‘all risks’. If the question is asking which clause *specifically* lists collision as a covered peril, then ICC (B) and (C) would be correct. However, the question asks which clause *covers* damage from a collision. ICC (A) covers it. ICC (B) covers it. ICC (C) covers it. The provided solution is ICC (A). This implies that the question is testing the understanding that ‘all risks’ inherently includes specific perils like collision. The explanation should focus on why ICC (A) is the correct answer in this context, emphasizing its comprehensive nature.

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 written 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, the standard practice for PL is ‘claims-occurring’. Therefore, a claim arising from an accident that happened within the policy year would be covered even if reported after the policy has expired, provided the policy’s notification requirements are met.

The question tests the understanding of an insurer’s obligation regarding policy renewals. According to general insurance principles, an insurer is not legally obligated 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 statement that an insurer does not have to remind the insured about renewal is accurate.

The scenario highlights the importance of timely notification of potential claims to an insurer. While the insured in the first case reported the claim within 20 days of the damage, 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 but ultimately ruled in favour of the insured due to the simplicity of the circumstances and the availability of repair documentation. However, the second case demonstrates a stricter interpretation. The insured failed to report the accident within the stipulated 30 days, and the Complaints Panel found this delay prejudiced the insurer’s investigation. The insured’s argument about a previous claim settlement was dismissed as irrelevant. The key takeaway is that while some leniency might be shown in simple cases with clear evidence, a significant delay that demonstrably hinders the insurer’s investigation, as seen in the second case, can lead to claim rejection. The question tests the understanding of the insurer’s right to investigate and how a breach of notification conditions, particularly when it causes prejudice, can impact a claim’s validity, referencing the principle that the contractual intention of the parties regarding the effect of breaching notification provisions is paramount.

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 the policy covers claims made during the period, not necessarily settled, although settlement timing can be relevant in some contexts, the primary trigger is the claim being made.

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 fraudulent activities by their employees. 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 training is important, it’s a component of a broader system, not the definition of the system of check itself.

This question tests the understanding of the Insurance Claims Complaints Bureau (ICCB) in Hong Kong, a key dispute resolution mechanism for insurance policyholders. The ICCB scheme is designed to provide an accessible and cost-effective avenue for resolving complaints against insurers. It is crucial to understand its scope, operational principles, and limitations. Specifically, the ICCB handles complaints related to both general and long-term insurance policies, not just personal ones. The service is free for complainants, making it an accessible recourse. However, the ICCB’s decisions are binding on the insurer if the complainant accepts the award, but the complainant can choose to reject it and pursue other legal avenues. The maximum claim amount that can be referred to the ICCB is HK$1,000,000, not HK$800,000. Therefore, only the statements that the scheme is free for complainants and that the maximum claim amount is HK$1,000,000 are correct.

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 or renewals. ‘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 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 likely not respond, as the condition precedent for its coverage would not be met.

The ‘step-back’ system for No Claim Discount (NCD) in private car insurance, as described in the Hong Kong insurance context, means that a single claim does not completely eliminate the accumulated discount. Instead, it reduces the discount to a lower tier. For drivers with a 50% or 60% NCD entitlement, a single claim will result in a renewal discount of 20% or 30% respectively. This is a key feature distinguishing it from a complete loss of discount after any claim. The scenario describes a driver with a 50% NCD who makes one claim. According to the ‘step-back’ rule for private cars, this would lead to a reduction in the NCD to 20% on renewal, not a complete forfeiture of the discount or a reduction to 0%.

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 pre-agreed conditions, 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.