Paper 2 General Insurance Quiz 42

This question tests the understanding of ‘System of Check’ in fidelity guarantee insurance, which is crucial for internal discipline and control within an employer’s operations. The correct answer highlights the proactive measures an employer takes to prevent losses from employee dishonesty. Option B is incorrect because while reporting is part of a system, it’s not the primary focus of the ‘System of Check’ itself, which is about preventative controls. Option C is incorrect as it describes a consequence of a breach, not the preventative system. Option D is too general and doesn’t specifically address the internal controls aspect of the ‘System of Check’.

The “step-back system” for No Claim Discount (NCD) in private car insurance, as described 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. The other options describe scenarios that would lead to a complete loss of NCD or are not directly related to the “step-back” mechanism for higher NCD brackets.

The scenario describes a situation where an insurance agent offers a substantial discount on a general insurance policy to a company’s employees, effectively reducing the premium below the standard rate. This practice, without the explicit written consent of the employer (the policyholder), is a form of rebating. Rebating is prohibited because it distorts the true cost of insurance, potentially leading to unfair competition and undermining the integrity of commission structures for intermediaries. The Code of Practice for the Administration of Insurance Agents and the minimum requirements of the Model Agency Agreement specifically address this issue, highlighting that such actions can be construed as bribery or corruption, as they offer an undue benefit to influence business decisions. Therefore, offering a discount to employees without the policyholder’s consent is a violation of these regulations.

A condition precedent to the contract is a term that must be fulfilled for the insurance contract to become effective. In this scenario, the insurer requires proof of the property’s structural integrity before the policy can commence. Failure to provide this proof means the condition precedent has not been met, and therefore, the contract never legally begins. A condition precedent to liability would apply after the contract is in force, affecting a specific claim. A condition subsequent would be a term to be complied with during the policy’s currency, not for its initial commencement. A cover note is a temporary confirmation of cover, not a condition for the contract’s inception.

The ‘step-back system’ for No Claim Discount (NCD) in private car insurance, as described in the IIQE syllabus, dictates how a claim affects the accumulated discount. For a private car with an entitlement of four or more years (equivalent to 50% or 60% NCD), a single claim in the policy year 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. The other options describe scenarios that would lead to a complete loss of NCD or are not directly related to the ‘step-back’ mechanism for higher NCD entitlements.

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 ‘Schedule’ within a scheduled policy form is the section that contains all the specific details pertaining to the individual risk being insured. This includes crucial information such as the policy number, the insured’s particulars, the sums insured, effective dates, a description of the insured item, the premium paid, and any special terms or endorsements that modify the standard wording. The other sections, like the Recital Clause, Operative Clause, and General Exceptions, provide the overarching contractual framework and conditions applicable to the policy class, but the Schedule is where the unique attributes of your specific insurance contract are detailed.

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 the scope of its applicability, the nature of its services, and the limitations on its awards. Specifically, the ICCB scheme applies to a broad range of insurance claims, not just personal lines, and the complainant is indeed not charged a fee. However, the ICCB’s jurisdiction is limited to a maximum claim amount, which is subject to periodic review. Furthermore, the decision of the ICCB is binding on the insurer if accepted by the complainant, but the complainant can choose not to accept the award and pursue other legal avenues. The appeal process is also specific to the ICCB’s internal review mechanisms, not a general appeal against its award by either party in the traditional legal sense. Therefore, understanding these specific operational parameters is vital for exam success.

The scenario highlights the importance of the insured’s duty to notify the insurer of a potential claim as soon as reasonably possible. While the insured in the first case lodged the claim within 20 days, the repair had already been completed, hindering the insurer’s ability to investigate the cause and extent of 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 alternative verification methods. 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, leading to the rejection of the claim. The insured’s argument about a previous claim settlement was deemed irrelevant. The core principle tested here is the insurer’s right to investigate and the potential consequences of delayed notification, which can lead to claim rejection if it prejudices the insurer’s position, as emphasized by the principle that a breach of a policy condition can nullify the right to claim if it causes prejudice.

The scenario describes a situation where a valuable antique vase is insured on an agreed value basis. This means that in the event of a total loss, the insurer will pay the agreed sum, irrespective of the vase’s actual market value at the time of the loss. However, for partial losses, the principle of strict indemnity applies, meaning the insurer will only pay the actual loss incurred, not exceeding the sum insured. This is a key characteristic of agreed value policies for certain high-value items, designed to simplify claims settlement for total losses while maintaining the indemnity principle for partial damage.

The question tests the understanding of the legal significance of a certificate of compulsory insurance, particularly in motor insurance. According to the provided text, a certificate of motor insurance merely confirms the existence of compulsory insurance as prescribed by law and does not detail the policy’s coverage level (e.g., Comprehensive or Act Only). The law mandates the issuance of these certificates, and failure to do so is a criminal offense. Furthermore, the law requires insurers to recover these certificates upon policy cancellation due to their critical legal importance. Therefore, a certificate of motor insurance serves as legal proof of compulsory insurance, not a comprehensive summary of policy terms.

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 truly commenced. 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, rather it might affect a specific claim or the continuation of cover under certain circumstances. ‘Consequential Loss’ refers to indirect financial losses resulting from an insured event, which are typically excluded from property insurance unless specifically covered by a business interruption policy.

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 continuous coverage, the insured must maintain continuous D&O insurance. If a company ceases trading or is dissolved, the directors may still be liable for past actions. Therefore, maintaining cover after leaving the company or after the company ceases operations is crucial. The scenario highlights the need for directors to consider how to preserve their coverage for potential future claims arising from their past tenure, especially when the company’s status changes. Option A correctly identifies the need for ongoing coverage to protect against future claims stemming from past actions, which is the core implication of a claims-made policy in such situations.

This question tests the understanding of the distinction between ‘Specified Perils’ and ‘All Risks’ cover in property insurance. ‘Specified Perils’ cover only losses caused by events explicitly listed in the policy, meaning the claimant must prove the loss was due to one of these named perils. ‘All Risks’ cover, conversely, covers all accidental losses unless specifically excluded, shifting the burden of proof to the insurer to demonstrate an exclusion applies. The scenario describes a situation where a loss occurred, and the claimant needs to demonstrate the cause was a specific event mentioned in their policy, which aligns with the definition of ‘Specified Perils’ cover.

The question tests the understanding of exclusions in engineering insurance, specifically Boiler Explosion Insurance. While war and similar risks are standard exclusions for many insurance policies, the key distinction for Boiler Explosion Insurance is that it typically excludes risks that are already covered by other, more specific policies, such as fire and extra perils. This is because these other perils have their own dedicated insurance coverage. Wilful neglect and wear and tear are also common exclusions, but the question asks for a risk normally insurable by other policies. Therefore, perils like fire and extra perils, which are usually covered under a standard fire policy, are the most appropriate answer.

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 mechanical failure of the refrigeration unit during transit, as this is not typically an excluded peril. Clause (B) would likely cover this if it were a specified peril, but it’s not guaranteed. Clause (C) would only cover it if it were explicitly listed as a covered peril, which is unlikely for mechanical breakdown. The question tests the understanding of the tiered coverage levels of the Institute Cargo Clauses.

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, where new information may need to be disclosed. Statement (ii) is also true; 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 apply. Statement (iv) is correct as 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; the renewal offer typically presents the insurer’s terms, which the insured can accept or reject. Therefore, statements (i), (ii), and (iv) are the accurate assertions regarding general insurance policy renewals.

This question tests the understanding of how an excess works in motor insurance, specifically in the context of property damage to the insured’s own vehicle. The scenario describes a loss of HK$12,000. An excess of HK$2,000 means the insured is responsible for the first HK$2,000 of the claim. Therefore, the insurer will pay the remaining amount, which is HK$12,000 – HK$2,000 = HK$10,000. The explanation clarifies that the excess is the portion of the loss not covered by the policy, and the insurer covers the amount exceeding the excess.

Average adjusters are specialists in marine insurance, particularly in the complex area of General Average (GA) claims. Their expertise is crucial due to the intricate legal knowledge required (international and national maritime laws), the large number of parties often involved (e.g., numerous cargo owners), and the lengthy investigation periods typically needed to settle these claims. While Lloyd’s Agents and Loss Adjusters are also involved in claims handling, average adjusters are specifically retained for the unique demands of GA, and sometimes for complex hull or cargo losses, distinguishing them from the more generalist roles of the others.

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 which vessels are subject to registration in Hong Kong under the relevant legislation. Option (a) correctly identifies vessels regularly employed in trading to or from Hong Kong, unless already registered elsewhere. Option (b) is incorrect because pleasure craft are specifically mentioned as requiring registration. Option (c) is incorrect as it describes a category of vessels that *do* require registration. Option (d) is incorrect because while fishing vessels are covered, the phrasing in (a) is a broader category that encompasses trading vessels not registered elsewhere.

A Performance Bond is a financial guarantee, structured as a bond rather than an insurance policy, designed to ensure the successful completion of a construction project within the agreed-upon timeframe. It protects the project owner from financial loss if the contractor fails to meet their contractual obligations, such as finishing the work on schedule. This differs from insurance policies which typically indemnify against loss arising from specified perils.

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 specific excess for certain types of claims.

Moral hazard refers to the increased likelihood of a loss occurring because an individual is insured. It’s often described as the ‘human element’ in insurance, encompassing attitudes and behaviours that can lead to adverse outcomes. While dishonesty (including fraud) is a direct manifestation, carelessness, unreasonableness (like stubborn inflexibility), and negative social behaviour (such as vandalism) are also considered forms of moral hazard. These behaviours, even if not overtly fraudulent, can significantly increase the probability or severity of claims, impacting the insurer’s risk assessment and pricing. The proposal form is a critical tool for underwriters to gather information, but it’s the underlying human factors that truly influence the risk profile.

A cover note is a temporary document that provides immediate evidence of insurance coverage, binding the insurer from the outset. It is not conditional on the submission of a full proposal form later. While it serves as proof of insurance, particularly for legally mandated insurance like motor insurance where it often includes a temporary certificate of insurance, its primary function is to offer immediate, albeit temporary, protection. The policy, on the other hand, is the final, formal document that replaces the cover note once the underwriting process is complete. A certificate of insurance, in its more common understanding, serves as proof of compulsory insurance and is a separate, permanent document, distinct from the temporary nature of a cover note.

A Performance Bond is a financial guarantee, structured as a bond rather than an insurance policy, designed to ensure that a contractor fulfills their contractual obligations, specifically the completion of construction work within the agreed-upon timeframe. This aligns with the definition provided, emphasizing its role in guaranteeing project completion.

The “step-back system” for No Claim Discount (NCD) in private car insurance, as described in the IIQE syllabus, dictates how a claim affects the accumulated discount. For a private car with an entitlement of four or more years (equivalent to 50% or 60% NCD), a single claim in the policy year 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 several claim-free years to rebuild to the previous level. Options B, C, and D describe scenarios that are either incorrect regarding the step-back system’s impact on higher NCDs or misrepresent the consequences of claims on NCD accumulation.

This question tests the understanding of exclusions in Directors’ and Officers’ (D&O) liability insurance, specifically concerning actions taken by the insured. The scenario describes a director who, prior to the policy’s inception, was aware of a potential issue but did not disclose it. D&O policies typically exclude coverage for claims arising from circumstances known or ought to have been known by the insured at the time of policy inception. This exclusion is designed to prevent individuals from obtaining coverage for known risks they failed to disclose. Option A correctly identifies this exclusion. Option B is incorrect because while dishonesty is an exclusion, the scenario focuses on prior knowledge of a circumstance, not necessarily an act of dishonesty at the time of the claim. Option C is incorrect as the policy generally covers legal expenses for defense, even if the claim is ultimately unsuccessful or based on excluded grounds, provided the initial defense is warranted. Option D is incorrect because contractual liability exclusions typically relate to the insured’s contractual obligations to third parties, not to the insured’s knowledge of circumstances prior to policy inception.

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 mechanical failure of the refrigeration unit during transit, as this is not typically an excluded peril. Clause (B) would likely cover this if it were listed as a specified peril, and Clause (C) would only cover it if it fell under a very narrow set of defined events, such as fire or explosion.

The question tests the understanding of the scope of theft insurance, specifically concerning damage to the premises during an attempted theft. According to the provided text, theft policies typically include coverage for damage caused by thieves to the insured premises when making forcible and violent entry or exit. This damage is not subject to a separate sum insured but is covered as part of the overall protection for stock and specified contents. Therefore, a scenario where a thief damages a shop’s door to gain entry and steals goods would be covered for both the stolen goods and the damage to the door, provided the entry was forcible and violent.