Paper 2 General Insurance Quiz 40

In the context of insurance contracts, a ‘representation’ is a statement of fact made by the proposer to the insurer before the contract is concluded. These statements are crucial for the insurer to assess the risk. The law, particularly the Insurance Ordinance (Cap. 41), mandates that such representations must be substantially true. If a representation is found to be untrue, and it is material to the risk, the insurer may have grounds to void the policy. The requirement is for substantial truth, not absolute accuracy, meaning minor inaccuracies that do not affect the insurer’s decision-making are generally acceptable. Representations do not need to be in writing unless specifically requested or required by law for certain types of insurance, and they can indeed affect the contract if they are material and untrue. Therefore, the most accurate statement is that representations must be substantially true.

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 is a key exclusion that limits coverage when a vehicle is used as a piece of equipment for a business, such as a mechanical digger performing its primary function. While compulsory insurance laws mandate certain third-party cover, this specific use case falls outside the standard scope of voluntary third-party liability for commercial vehicles, unless explicitly covered or required by statute. The other options represent different types of exclusions or are not typically exclusions under third-party cover for commercial vehicles.

This question tests the understanding of how insurers manage risk through policy endorsements. When an insurer identifies a specific, known risk that deviates from the standard profile for a particular policyholder or item, they can use an exclusion clause. This clause carves out coverage for that specific risk, while the rest of the policy remains in effect. For instance, in a personal accident policy, if an individual has a pre-existing back condition like a slipped disc, the insurer might exclude coverage for any claims arising from that specific condition, even if the individual is otherwise a standard risk. This allows the insurer to offer coverage for other types of accidents while managing the increased risk associated with the back problem. Options B, C, and D describe different concepts. Option B refers to a general market exclusion, which is a standard exclusion applied across many policies in the market, not specific to an individual risk. Option C describes a situation where an insurer might refuse to renew a policy, which is a different action than modifying the terms of an existing policy. Option D describes a situation where an insurer might cancel a policy, which is also a different action than modifying its terms.

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.

A Scheduled Policy Form is a common structure for insurance policies that includes a policy schedule. This schedule details specific information about the policy, such as the insured’s name, the property covered, the sum insured, and the period of insurance. The Signature Clause, also known as the Attestation Clause, is a crucial part of this form where the insurer formally confirms their commitment and undertakings under the contract. Without this signature, the policy might not be considered fully executed. While a simple contract can be verbal or inferred from conduct, and specific exclusions are tailored to individual risks, and a step-back system relates to no-claim discounts, the Signature Clause is the element that formally binds the insurer within the Scheduled Policy Form.

The Motor Vehicles Insurance (Third Party Risks) Ordinance mandates compulsory third-party motor insurance in Hong Kong. This legislation ensures that victims of motor accidents have a recourse for compensation, even if the at-fault driver’s insurer becomes insolvent. The Motor Insurers’ Bureau of Hong Kong (MIB) plays a crucial role in fulfilling this legislative intent by providing a safety net for such situations, funded by levies on motor insurance premiums. Therefore, understanding this ordinance is fundamental to the compulsory nature of motor insurance in the territory.

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 with the insurer only after the repair was completed and the watch was collected, which was two weeks after the incident. The provided text emphasizes the importance of timely notification to the insurer as per policy conditions. While the insured acted promptly in getting the watch repaired, the delay in notifying the insurer about the potential claim, even after the loss occurred, could be a breach of the ‘as soon as possible’ notification clause. This delay might impact the insurer’s ability to investigate the loss effectively or assess the damage independently. Therefore, the claim might be considered invalid due to non-compliance with the notification requirement, which is a crucial policy provision affecting claims.

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, which is also a common inclusion. Option (c) highlights efficiency and ethical business practices, another key aspect. Option (d) focuses on claims handling, a crucial service promise. The provided text emphasizes that these declarations are declarations of intent and measures of performance, encompassing a range of commitments to ensure customer satisfaction and maintain trust. Therefore, a comprehensive declaration would likely include all these elements to demonstrate a holistic approach to customer service and business conduct.

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 payable by the insured. The insured chooses a higher excess amount in exchange for a lower premium. This is in addition to any compulsory excess that might apply to the policy, such as a young driver excess.

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 if a director leaves a company, they need to consider how to maintain coverage for potential future claims arising from their past actions. The scenario highlights the importance of considering the continuation of cover after leaving the company, which is a direct implication of the claims-made basis. Option B is incorrect because a ‘claims-occurring’ basis would cover incidents that happened during the policy period, even if the claim is made later, which is not how D&O insurance typically operates. Option C is incorrect as the premium basis for D&O is usually flat, not adjustable based on claims, and this is not the core concept being tested. Option D is incorrect because while retroactive cover might be granted, the fundamental aspect of maintaining cover after leaving the company is tied to the ‘claims-made’ nature of the policy, not the retroactive extension itself.

This question tests the understanding of how contract terms are classified based on their timing of operation within an insurance contract. A ‘condition precedent to liability’ is a term whose breach does not void the entire contract but specifically invalidates a particular claim. The scenario describes a situation where the insured fails to notify the insurer of a change in profession, which is a common example of a condition that, if breached, affects the insurer’s obligation to pay a specific claim rather than the contract’s existence itself. Option B describes a condition precedent to the contract, which must be met for the contract to begin. Option C describes a condition subsequent, which, if it occurs, can terminate the contract. Option D is too broad and doesn’t accurately reflect the consequence of breaching a notification clause in this context.

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 concepts: a market exclusion is a general exclusion common across the industry (like nuclear risks), a general exclusion is a broad exclusion applicable to all policies of a certain type, and a public policy exclusion relates to legal or societal principles that render a contract unenforceable.

The question tests the understanding of the legal significance of a certificate of compulsory insurance, particularly in motor insurance. Section 2.2.4 (iv) of the provided text explicitly states that these certificates are issued solely because the law requires them and that failure to issue one is a criminal offense. It further emphasizes the legal importance of the certificate, making it essential for the insurer to recover it upon policy cancellation. Therefore, the primary purpose and legal mandate for issuing such a certificate is to fulfill a statutory requirement, not to provide a detailed summary of policy terms or to serve as proof of premium payment.

The scenario describes a situation where an insurer rejected a hospitalization claim based on a pre-existing condition. The insured had consulted for rectal bleeding 15 months before applying for insurance, and the insurer argued that the colon tumour, diagnosed shortly after policy inception, could not have developed within that short timeframe. The Complaints Panel, considering the tumour’s size, agreed that it likely took time to grow. Crucially, the policy excluded illnesses that presented signs or symptoms prior to the commencement date. Since the initial consultation for rectal bleeding (a potential symptom) occurred well before the policy began, and the tumour’s growth indicated it likely predated the policy, the insurer’s decision to reject the claim was upheld. This aligns with the principle that insurance policies typically do not cover conditions that were already present or manifesting before the policy’s effective date, even if not formally diagnosed.

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, which cover wrongful acts that happen during the policy period, even if the claim is made later. Therefore, for an individual director to maintain coverage after leaving a company, they must ensure that either the policy is extended to cover them for future claims arising from past acts (e.g., through a discovery clause or extended reporting period) or that they have a separate policy in place. The scenario highlights the importance of considering the policy’s basis of cover for continuity of protection, especially when an individual’s relationship with the company changes.

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 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 the policyholder if they do not intend to renew the policy, allowing the insured to seek alternative coverage. Statement (iii) is false because while terms can be negotiated, they are not entirely ‘freely’ negotiable as they must still align with the insurer’s underwriting guidelines and regulatory requirements. Therefore, statements (i), (ii), and (iv) are the accurate assertions regarding general insurance policy renewals.

Institute Cargo Clauses (A) provides the broadest coverage, operating on an ‘all risks’ basis. This means it covers all losses unless specifically excluded. Clauses (B) and (C) are more restrictive, covering only specified perils. Therefore, a shipment insured under Clause (A) would be covered for damage caused by a sudden, unexpected event like a rogue wave, provided it’s not an excluded peril. Clause (B) would likely cover this if the rogue wave was considered a peril of the sea, but it’s less certain than (A). Clause (C) would only cover it if ‘perils of the sea’ were explicitly listed as a covered peril and the rogue wave fell under that definition, which is less likely to be as comprehensive as (A). The question tests the understanding of the hierarchical coverage levels of the Institute Cargo Clauses.

This question tests the understanding of an insurance broker’s obligations regarding client funds, specifically the requirement to maintain separate client accounts. The Insurance Authority mandates this practice to safeguard client monies from the broker’s own operational funds, thereby preventing commingling and ensuring client assets are protected. Failure to do so can lead to financial mismanagement and potential loss for clients, which is a serious breach of regulatory requirements for insurance brokers.

The core principle of an indemnity policy is to restore the insured to their pre-loss financial position. When new parts replace old, worn-out parts, the insured is placed in a better position due to the improved condition and lifespan of the new components. This betterment must be accounted for, and the insured is typically required to contribute to the cost of these new parts to reflect this advantage. The scenario highlights that the insurer applied a 35% betterment contribution, which was deemed reasonable given the vehicle’s age and the normal depreciation rates. The policy’s exclusion of depreciation further supports the insurer’s stance, as the betterment contribution is a way to offset the advantage gained by the insured from receiving new parts.

The scenario highlights the importance of timely notification of potential claims. While the insured believed 20 days was reasonable and presented damaged parts, the insurer was prejudiced by the repair being completed before their investigation. The Complaints Panel acknowledged the prejudice but considered the insured’s layman perspective and lack of prior claims history, ultimately awarding the repair cost. This implies that while a breach of the notification condition occurred, it did not automatically void the claim due to the specific circumstances and the panel’s interpretation of ‘as soon as reasonably possible’ in this context, especially when the insurer could still verify the damage. The key takeaway is that prejudice to the insurer’s ability to investigate is a significant factor, but not always an absolute bar to a claim, particularly if the delay is deemed reasonable from a layman’s perspective and the claim is genuine.

The scenario describes a shop owner losing cash from her bag after closing her shop. The money insurance policy explicitly states that cover is for losses occurring during normal business hours while being conveyed by a messenger. Since the loss happened outside business hours, it falls outside the defined scope of cover for this specific policy, leading to the rejection of the claim. The policy’s wording is crucial here, limiting coverage to a specific timeframe to manage risk and premium.

This question tests the understanding of how travel insurance premiums are determined. While geographical area, duration, and the number of people insured are primary factors, the concept of an ‘annual policy’ is a specific pricing structure designed for frequent travelers. This structure offers a single premium for a defined period, often a year, covering multiple trips, which is distinct from per-trip pricing. Therefore, the existence of an annual policy option is a feature that influences premium calculation by providing an alternative to individual trip premiums.

A Certificate of Insurance serves as a formal confirmation of the existence of compulsory insurance. It is a standalone document, distinct from the main policy, and is commonly issued for motor vehicle and pleasure craft insurance. This certificate provides proof that the required insurance is in place, fulfilling legal obligations. While a policy document details the full terms and conditions, the certificate is the readily available proof of coverage.

This question tests the understanding of how changes in the insured risk can impact the insurance contract. The Insurance Companies Ordinance (Cap. 41) and related common law principles dictate that if the circumstances under which a risk was insured alter for the worse, the insurer may have grounds to cancel the policy. This is because the original assessment of the risk, and therefore the premium charged, may no longer be adequate. The insurer’s right to cancel in such situations is a fundamental aspect of maintaining the integrity of the insurance contract and managing their exposure to unforeseen adverse changes in risk.

This question tests the understanding of how travel insurance premiums are determined. While geographical area, duration, and the number of people insured are primary factors, the concept of an ‘annual policy’ is a specific pricing structure designed for frequent travelers. This structure offers a single premium for a defined period, typically a year, covering multiple trips. The other options represent individual trip factors or general policy features, not the specific pricing model for frequent travelers.

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 is in addition to any compulsory excess that might apply to the policy, such as a young driver excess.

Institute Cargo Clauses (A) provides the broadest coverage, insuring against all risks of physical loss or damage to the insured subject matter, except for those specifically excluded. This is often referred to as ‘all risks’ coverage. Clauses (B) and (C) offer more limited protection, covering only a specified list of perils. Therefore, a shipment insured under Clause (A) would be protected against damage caused by a sudden, unforeseen event like a ship’s engine malfunction leading to a delay and spoilage, provided it’s not an excluded peril.

The provided text states that Personal Accident (PA) policies in Hong Kong are typically ‘Accidents Only’ policies. This means they are designed to cover benefits arising from accidental bodily injury or death. Sickness benefits, which cover illness, are generally not included. Death from sickness is explicitly mentioned as a life insurance risk and not covered under a PA policy. Therefore, a policy that includes coverage for death due to sickness would deviate from the standard ‘Accidents Only’ nature of PA policies in Hong Kong.

The scenario describes a situation where an insured person, a businessman who travels frequently, sustained a back injury. Initially, he was paid Temporary Total Disability (TTD) benefits. However, the insurer later reclassified his condition to Temporary Partial Disability (TPD) based on a medical examiner’s report indicating an improvement in his trunk movement. The key issue is the conflicting medical opinions regarding whether the insured was still unable to perform *any* work. 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 specific date. This implies that the insurer’s unilateral decision to change the benefit classification without a clear consensus or a policy provision allowing such a change based on partial improvement was challenged. The panel’s decision to continue TTD benefits until the date specified by the attending doctors highlights the importance of medical evidence and the insurer’s obligation to adhere to the policy’s terms regarding the definition of total disability, especially when there’s a dispute.

This question tests the understanding of what constitutes a material fact that an applicant must disclose to an insurer. According to insurance principles, a material fact is one that would influence a prudent underwriter’s decision to accept the risk or the terms offered. Storing highly flammable materials like chemicals in a general store, where such items are not typically expected, significantly increases the fire risk beyond what a prudent underwriter would anticipate for a standard general store. This directly aligns with the definition of a material fact that renders a risk greater than would otherwise be supposed. Option B is incorrect because while common knowledge of typhoons in Hong Kong is not a material fact to be disclosed for extra perils insurance, the presence of unusual, high-risk items is not common knowledge. Option C is incorrect because while an insurer might know the general dangers of occupations, they wouldn’t necessarily know about specific, undisclosed hazardous materials stored on the premises. Option D is incorrect because while an insurer should inquire about blank or uncertain answers, the proactive disclosure of a fact that fundamentally alters the risk profile (like storing hazardous chemicals) is the applicant’s responsibility, especially when it’s not a standard practice for the business type.