Paper 2 General Insurance Quiz 43

This question tests the understanding of the legal implications of general insurance policy renewals in Hong Kong. Statement (i) is true because the duty of utmost good faith, which requires full disclosure of all material facts, is a continuous obligation that is particularly important at renewal when circumstances may have changed. 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 apply. 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 as they must still align with the insurer’s underwriting guidelines and the principles of insurance. Therefore, statements (i), (ii), and (iv) accurately reflect the principles of general insurance policy renewals.

This question tests the understanding of contract terms in insurance, specifically the classification of conditions based on their timing of operation. A ‘condition precedent to liability’ is a term that, if breached, does not void the entire contract but rather invalidates a specific claim. The scenario describes a notification requirement where failure to comply leads to the forfeiture of rights for a particular claim, fitting the definition of a condition precedent to liability. Options B and C describe conditions precedent to the contract (affecting the contract’s commencement) and conditions subsequent to the contract (occurring after the contract is in force and potentially affecting it), respectively. Option D is a distractor as it mischaracterizes the effect of breaching such a condition.

A warranty in insurance is an absolute undertaking by the insured to the insurer. A breach of this undertaking, regardless of its impact on the claim, can automatically void the policy from the date of the breach. However, insurers in Hong Kong have voluntarily agreed, through the Hong Kong Federation of Insurers’ Code of Conduct, to only deny a claim due to a warranty breach if there is a causal link between the breach and the loss, or if the breach was fraudulent. This means that a breach without a causal connection or fraud would not typically be used to refuse a claim, even though technically it’s a breach of warranty.

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 serves as a placeholder, often used in motor insurance to facilitate vehicle registration, and can be cancelled with proper notice. While it confirms coverage, it is not a final contract and is typically replaced by a formal policy. A policy, on the other hand, is the definitive document representing the completed contract, incorporating all agreed terms and replacing any prior cover notes. A certificate of insurance, in its more common understanding, serves as proof of compulsory insurance, particularly for motor vehicles, and is a separate, permanent document, distinct from the policy itself, although a temporary motor certificate might be embedded within a cover note.

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 emphasizes the importance of timely notification to the insurer as per policy conditions. While the insured acted promptly to get the watch repaired, the delay in notifying the insurer about the incident itself, before or immediately after the repair, could be a breach of the ‘as soon as possible’ notification clause. This delay, even if the repair was done, might affect the insurer’s ability to investigate the cause of the loss or assess the damage independently, potentially impacting the claim’s validity. Therefore, the insurer might consider the claim invalid due to the late notification of the incident, despite the prompt repair.

The question tests the understanding of the specific limitations of motor insurance policies for motorcycles, particularly concerning theft claims. While private car policies typically cover the loss of accessories due to theft, motorcycle policies often stipulate that only the complete theft of the entire machine is admissible. This means that if only parts or accessories of a motorcycle are stolen, the ‘Own Damage/Accidental Damage’ section of the policy would not provide coverage for that specific loss.

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 detail the specific terms of coverage like ‘Comprehensive’ or ‘Act Only’, which are typically found in the policy document itself, not the certificate.

The question tests the understanding of exclusions in pleasure craft insurance, specifically regarding 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* permanently marked, it would be covered under the policy for specified perils. Therefore, the scenario where the ship’s boat is properly marked would lead to its inclusion in the coverage.

This question tests the understanding of waiver in the context of insurance premium payments. Waiver occurs when an insurer, through its actions or representations, indicates it will not strictly enforce a contractual term, such as the punctuality of premium payments. If an insurer consistently accepts late premium payments without objection, it may be considered to have waived its right to demand strict punctuality in the future. Estoppel, on the other hand, requires the insured to demonstrate reasonable reliance on the insurer’s conduct or representation, leading to a detrimental change in their position if the insurer were to revert to strict enforcement. Therefore, the scenario describes a situation where the insurer’s past acceptance of late payments could lead to a waiver of the strict due date requirement.

The Motor Vehicles Insurance (Third Party Risks) Ordinance mandates compulsory third-party motor insurance in Hong Kong. This ordinance ensures that victims of motor accidents have a legal recourse for damages caused by negligent drivers. The Motor Insurers’ Bureau of Hong Kong (MIB) plays a crucial role in fulfilling the intentions of this compulsory insurance by providing coverage when a valid policy is not in place or is ineffective, thereby safeguarding the public interest.

Fidelity Guarantee Insurance indemnifies employers against financial losses resulting from dishonest acts by their employees. The question describes a scenario where an employee’s actions led to a financial shortfall due to unauthorized transactions. This directly aligns with the core purpose of Fidelity Guarantee Insurance, which covers losses arising from fraud or dishonesty. Option B is incorrect because while errors and omissions can lead to financial loss, Fidelity Guarantee specifically targets dishonest acts, not general mistakes. Option C is incorrect as Public Liability insurance covers legal liabilities to third parties for injury or property damage, not internal employee fraud. Option D is incorrect because Marine Cargo insurance covers loss or damage to goods during transit, which is unrelated to employee dishonesty within an organization.

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 making a decision that, while not fraudulent, leads to a financial loss for the company due to a lack of due diligence. D&O policies typically exclude claims arising from dishonesty or fraud of the insured director. However, a failure in due diligence, while potentially negligent, does not automatically equate to dishonesty or fraud. The exclusion for ‘personal profit’ applies when the director gains an unfair advantage, which is not stated here. ‘Known circumstances’ exclusion applies to issues known at policy inception, which is also not indicated. Therefore, a claim stemming from a failure in due diligence, without evidence of dishonesty or personal profit, would generally be covered, provided it falls within the definition of a ‘wrongful act’ and is not excluded by other policy terms.

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.

The question probes the understanding of prohibited practices in the insurance intermediary sector, specifically concerning rebating. Rebating, in essence, involves offering inducements to policyholders that are not part of the insurance contract itself. This practice is detrimental because it distorts the principle of fair risk assessment and pricing, potentially leading to adverse selection and undermining the integrity of the insurance market. It also creates an unfair competitive advantage for intermediaries who engage in such practices. The Code of Practice for the Administration of Insurance Agents and the Minimum Requirements of the Model Agency Agreement explicitly prohibit offering commissions or other valuable considerations to employees or associates of the insured without the insured’s explicit written consent. This is to prevent situations where the true cost of insurance is masked, and to ensure that commissions are transparently linked to the intermediary’s services and not used as a means to secure business through unfair means, which can be construed as a form of bribery or corruption.

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 compulsory excess that might apply to the policy, such as 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 ‘Public Policy’ in the context of insurance law, specifically how it can render certain agreements void. The scenario describes an agreement that restricts an individual’s freedom to marry. Such restrictions are generally considered contrary to public policy because they infringe upon fundamental personal liberties. Therefore, an agreement that limits an individual’s right to marry would be void and unenforceable on public policy grounds. Options B, C, and D describe concepts related to insurance but do not directly address the principle of public policy rendering an agreement void in the way described.

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 insured, irrespective of the vase’s actual market value at the time of the loss. This is a key feature of agreed value policies for items like jewelry and antiques, designed to avoid disputes over valuation in case of a complete loss. For partial losses, however, the principle of strict indemnity typically applies, meaning the payout would be based on the actual loss incurred, not the agreed value. Therefore, the agreed value is payable for a total loss, but strict indemnity applies to partial losses.

Fidelity Guarantee Insurance indemnifies employers against financial losses resulting from dishonest acts by their employees. The question describes a scenario where an employee’s actions led to a financial shortfall due to unauthorized transactions, which falls under the scope of dishonest acts covered by fidelity insurance. Options B, C, and D describe situations that are typically excluded or not the primary focus of fidelity guarantee insurance: general errors and omissions (which are not necessarily dishonest), damage to property (which would be covered by other types of insurance like property damage), and contractual disputes (which are civil matters and not directly related to employee dishonesty).

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 and within the territory of Hong Kong.’ Since the loss happened outside of business hours, it falls outside the defined scope of coverage for this specific policy, leading to the rejection of the claim. The policy’s intention is to cover business money during operational periods, not personal funds or losses occurring after closing.

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. The ‘Road Traffic Act 1930’ is foundational legislation for compulsory motor insurance in the UK, but it doesn’t directly dictate the specific factors used for premium calculation. ‘Public Policy’ is a broad legal concept that can invalidate certain agreements but isn’t a direct factor in premium setting. ‘Salvage (Non-Marine)’ refers to the residual value of damaged property after a claim, which is a consequence of a claim, not a factor in setting the initial premium. ‘Rating Features’ are precisely the elements used by insurers to calculate premiums, such as the vehicle’s engine capacity, its usage, and its value, as mentioned in the provided text.

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 HK$500,000, but the actual value at risk is HK$750,000, meaning the property is under-insured by 33.3% (HK$250,000 / HK$750,000). The pro rata average condition stipulates that the claim payment will be reduced proportionally to the extent of under-insurance. Therefore, if a loss of HK$150,000 occurs, the payout will be limited to the proportion of the sum insured to the value at risk, which is HK$500,000 / HK$750,000 = 2/3. Thus, the claim payment would be (2/3) * HK$150,000 = HK$100,000. The explanation clarifies that this condition is applied to prevent policyholders from insuring only a portion of their property’s value while expecting full coverage for any loss.

In the context of marine insurance claims, the assured (the policyholder) is typically responsible for arranging and initially paying for a surveyor’s report. This report serves as an independent assessment of the cause and extent of the loss. While the surveyor’s fee is generally recoverable from the insurer if the claim is valid, the initial appointment and payment rest with the assured. Loss adjusters, on the other hand, are usually appointed and paid by the insurer to investigate and negotiate claims, particularly for non-marine losses.

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 employment termination.

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. Options B, C, and D describe different types of exclusions or policy adjustments that are not directly related to the scenario of an underwriter specifically addressing a known, isolated risk within an otherwise standard profile.

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 that later led to a claim. D&O policies typically exclude coverage for circumstances known or that ought to have been known at the policy inception date. This exclusion aims to prevent individuals from obtaining insurance coverage for known risks they have already chosen to undertake. Option B is incorrect because while dishonesty is an exclusion, the scenario doesn’t explicitly state dishonesty, and the primary exclusion here is prior knowledge. Option C is incorrect as contractual liability exclusions are separate from the concept of prior knowledge. Option D is incorrect because while pollution is a standard exclusion, it’s not the relevant exclusion for the given scenario.

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 a ‘Specified Perils’ policy, this would likely result in a denied claim because the claimant cannot prove the loss was due to a named peril. However, under an ‘All Risks’ policy, the claimant only needs to demonstrate that 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 for the claimant.

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. This proactive disclosure is essential for the insurer to accurately assess the risk and underwrite the policy appropriately. Therefore, facts that influence an underwriter’s judgment on premium or acceptance are considered material.

The scenario describes a situation where valuable items like jewelry are insured on an agreed value basis. This means that in the event of a total loss, the insurer will pay the sum insured (the agreed value) regardless of the actual market value of the items 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 agreed value. This approach is common for items whose value fluctuates or is difficult to ascertain precisely at the time of loss, providing certainty for the insured in case of a complete loss.

The ‘Schedule’ within a scheduled policy form is the section that specifically details all information pertinent to the individual risk being insured. This includes crucial data such as the policy number, the insured’s particulars, the sums insured or limits of liability, effective dates, a description of the insured subject matter, the premium paid, and any special terms, warranties, exclusions, or endorsements that modify the standard policy wording. The Recital Clause introduces the contract and references the proposal form, while the Operative Clause outlines the circumstances under which coverage is active, and General Exceptions apply to the entire contract. Therefore, identifying the policy number falls under the purview of the Schedule.

This question tests the understanding of how changes in the original circumstances of an insured risk can impact the policy. The Insurance Ordinance (Cap. 41) and general insurance principles dictate that if the risk deteriorates significantly after the policy inception, the insurer may have grounds to adjust terms or even cancel the policy, provided the policy terms allow for such actions. Option A correctly identifies that a worsening of the risk circumstances can lead to policy adjustments or cancellation, reflecting the insurer’s right to manage its exposure. Option B is incorrect because while an insurer might offer a standard policy, the core principle is to underwrite the risk as it is, and significant adverse changes can necessitate deviations from standard terms. Option C is incorrect as the insurer’s primary concern is the risk itself, not necessarily the insured’s financial stability, unless it directly relates to moral hazard. Option D is incorrect because while insurers assess risk, the focus is on the risk’s characteristics and potential for claims, not on the insured’s personal preferences for policy wording unless it’s a standard underwriting consideration for a specific risk.