Paper 2 General Insurance Quiz 50

This question tests the understanding of the relationship between material damage insurance and business interruption (BI) insurance, specifically the ‘material damage proviso’ in BI policies. This proviso stipulates that a claim under a BI policy is contingent upon a valid claim being payable under the associated material damage policy for the same insured peril. If the material damage policy does not cover the event causing the interruption, or if it’s invalid, the BI claim will not be admitted. Therefore, the absence of a valid material damage cover for the physical loss directly invalidates the business interruption claim.

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 and pleasure vessel insurance to demonstrate compliance with legal requirements. While it confirms coverage, it is not the primary document for detailing all policy terms and conditions, nor is it a guarantee of the insurer’s financial solvency, which is typically addressed through regulatory oversight and solvency requirements.

The Insurance Claims Complaints Bureau (ICCB) is designed to handle disputes related to personal insurance claims. It has a jurisdictional limit of HK$800,000 for the value of the claim. Complaints exceeding this amount, or those arising from commercial, industrial, or third-party insurance, fall outside the ICCB’s purview and must be resolved through other means such as litigation or arbitration. Therefore, a dispute involving a commercial property insurance claim, regardless of its monetary value, would not be handled by the ICCB.

This question tests the understanding of specific exclusions within a Product Liability policy. Option (a) correctly identifies that liability stemming from the inherent design flaws or specifications of a product, such as a TV cabinet designed to hold only 50kg failing under a 55kg load, is typically not covered. This is a common exclusion to prevent insurers from covering inherent product defects that should be addressed by the manufacturer’s design process. Option (b) is incorrect because while liability for property damage is generally covered, the specific exclusion relates to the *design* of the goods, not just any property damage. Option (c) is incorrect as liability for faulty installation, if not directly related to a manufacturing defect in the product itself, might be covered, but the question focuses on the design flaw. Option (d) is incorrect because while the policy covers liability for injury or property damage, the exclusion specifically targets issues arising from the product’s design, plan, formula, or specification.

A Performance Bond is a financial guarantee, structured as a bond rather than an insurance policy, that ensures a contractor will complete a construction project within the agreed-upon timeframe and according to the contract’s specifications. It protects the project owner from financial loss if the contractor defaults or fails to complete the work. The question tests the understanding of the fundamental nature and purpose of a Performance Bond in the context of construction projects, distinguishing it from other financial instruments or insurance products.

The question tests the understanding of policy conditions, specifically the ‘Average’ condition. The Average clause is a penalty for under-insurance. If the sum insured is less than the value of the property at the time of loss, the insurer will only pay a proportion of the loss, calculated based on the ratio of the sum insured to the actual value. In this scenario, the property’s value is HK$500,000, but it is insured for only HK$300,000. The loss is HK$100,000. Applying the Average clause, the insurer will pay (Sum Insured / Value of Property) * Loss = (HK$300,000 / HK$500,000) * HK$100,000 = 0.6 * HK$100,000 = HK$60,000. Therefore, the insured will bear the remaining HK$40,000.

The Employees’ Compensation Assistance Scheme (ECAS) is designed to provide a safety net when an employer’s compulsory employees’ compensation insurance is absent or ineffective. This central fund, financed partly by a levy on insurance premiums, steps in to ensure that employees injured or killed in the course of employment receive compensation, even if their employer has failed to secure the required insurance. Therefore, its primary purpose is to act as a fallback mechanism for compensation when the primary insurance fails.

This question tests the understanding of the legal implications of policy renewals in Hong Kong. Statement (i) is correct because the duty of utmost good faith, which is fundamental to insurance contracts, is a continuous obligation and is particularly relevant at renewal when new information may need to be disclosed. Statement (ii) is also correct; a renewal is legally 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 true as insurers have an obligation to inform policyholders if they do not intend to renew a policy, allowing the insured to seek alternative coverage. Statement (iii) is incorrect because while terms can be negotiated, they are not ‘freely’ negotiable in the sense that the insurer still operates within the bounds of underwriting principles and regulatory requirements; the insurer is not obligated to agree to any proposed changes.

A fire business interruption policy is designed to compensate an insured business for financial losses incurred due to a disruption of operations caused by a covered peril, such as fire. This compensation typically extends beyond the direct physical damage to cover consequential losses like loss of profit and ongoing expenses that continue even when the business is not operating. Options (a), (b), and (c) describe direct physical damage or third-party liabilities, which are generally covered by other types of insurance policies (e.g., property insurance for buildings and contents, or third-party liability insurance). Therefore, the primary purpose of business interruption insurance is to address the financial impact of the disruption itself, including lost earnings.

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 is the employer’s legal duty to compensate for work-related injuries, irrespective of fault, which is covered by compulsory insurance.

The question tests the understanding of specific exclusions in third-party liability cover for commercial vehicles, as distinct from private car policies. The ‘tool of trade’ clause specifically excludes damage caused when a vehicle is used as a tool for its primary function, such as a mechanical digger being used for excavation. While compulsory insurance laws mandate certain third-party cover, this exclusion applies to the *scope* of the voluntary cover provided by the insurer beyond the statutory minimums. Food poisoning claims are also excluded, as is damage to the vehicle’s own stock-in-trade. Damage to roads or weighbridges due to the vehicle’s weight or vibration is another specific exclusion. Therefore, the use of a vehicle as a tool of trade, unless mandated by statutory provisions for compulsory insurance, is a key exclusion.

Moral hazard refers to the increased likelihood of a loss occurring because an individual is insured. It’s often linked to the ‘human element’ of risk, encompassing attitudes and behaviours. While dishonesty (including fraud) is a direct manifestation, carelessness, unreasonableness (like inflexibility or opinionated views leading to problems), and negative social behaviour (such as vandalism) are also considered forms of moral hazard. These behaviours can increase the probability or severity of a claim, even if not driven by outright fraud. Therefore, all listed behaviours can contribute to adverse moral hazard.

This question tests the understanding of exclusions in engineering insurance, specifically Boiler Explosion Insurance. The provided text states that risks normally insurable by other policies, such as fire and extra perils, are excluded from Boiler Explosion Insurance. This is to prevent duplication of coverage and ensure that each policy covers distinct risks. Therefore, a fire that occurs during a boiler explosion would typically be covered by a separate fire insurance policy, not the boiler explosion policy.

The scenario highlights the importance of timely notification of potential claims to an insurer. While the insured in the first case reported the damage within 20 days, 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 presents a clearer breach. The insured failed to report the accident within the stipulated 30 days, and the Complaints Panel explicitly stated that the delay prejudiced the insurer’s investigation. The insured’s argument about a prior claim settlement being a precedent was also dismissed. Therefore, the insurer’s rejection of the claim in the second scenario is upheld because the delay in reporting directly impacted the insurer’s ability to assess the claim’s validity, a key principle in insurance contracts. The concept of ‘prejudice’ to the insurer’s investigation is central to determining the outcome of late notification, and in the second case, this prejudice was clearly established and accepted by the Complaints Panel.

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 on a “claims-occurring” basis, meaning that the policy covers incidents that happen during the policy period, regardless of when the claim is actually made. While “claims-made” policies are not unknown, they are not the common practice for PL insurance. Therefore, a policy that covers claims reported within the policy period but arising from incidents that occurred outside that period would not align with the typical “claims-occurring” basis.

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). Its primary purpose is to satisfy legal requirements, and its issuance is mandated by law. Failure to issue such a certificate is a criminal offense. The text explicitly states that the certificate has such legal importance that the insurer must recover it if the policy is cancelled, highlighting its role in demonstrating compliance with compulsory insurance laws.

The scenario describes a situation where an insurer rejected a hospitalization claim due to a pre-existing condition. The insured had consulted for rectal bleeding 15 months before applying for insurance, and the insurer believed the colon tumor could not have developed within 10 days of policy inception. The Complaints Panel, considering the tumor size, agreed that it likely took time to grow, thus supporting the insurer’s decision. The key principle here is the ‘pre-existing condition’ clause, which typically excludes coverage for illnesses or conditions that manifested signs or symptoms before the policy’s effective date. While the exact onset date can be challenging to pinpoint, the panel’s reasoning, based on the tumor’s size and the timeline, indicated that the condition likely predated the policy, even if the formal diagnosis occurred shortly after. Therefore, the insurer acted within its rights based on the policy’s exclusion for conditions that commenced or presented symptoms prior to the policy’s commencement.

The question tests the understanding of an insurer’s obligation regarding policy renewals. According to general insurance principles, an insurer is not legally mandated 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 insurer is not obligated to provide a reminder for renewal.

The scenario describes a situation where an insurer rejected a hospitalization claim based on a pre-existing condition. The insured had a prior consultation for rectal bleeding 15 months before applying for insurance, and the insurer argued that the size of the diagnosed colon tumor indicated it could not have developed within the 10 days following the policy’s inception. The Complaints Panel, considering the tumor’s size and the likelihood of gradual development, agreed with the insurer. The key principle here is the ‘pre-existing condition’ exclusion, which typically covers illnesses or injuries that showed signs or symptoms before the policy commencement date. While the exact onset date of the cancer was difficult to pinpoint, the evidence (tumor size) suggested it predated the policy. Therefore, the insurer’s rejection was deemed reasonable under the policy’s terms, as the condition likely commenced or presented symptoms prior to the policy’s effective date, even if the formal diagnosis occurred shortly after.

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.

A ‘Condition Precedent to the Contract’ is a stipulation that must be fulfilled for the insurance agreement to become effective. Failure to meet this condition means the contract never legally commences. In contrast, a ‘Condition Precedent to Liability’ relates to a condition that must be met for a specific claim to be valid, even if the contract itself is 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, though it might affect a specific claim. ‘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.

The Insurance Claims Complaints Bureau (ICCB) is designed to handle disputes related to personal insurance claims. It has a jurisdictional limit of HK$800,000 for the value of the claim. Complaints exceeding this amount, or those arising from commercial, industrial, or third-party insurance, fall outside the ICCB’s purview and must be resolved through other means such as litigation or arbitration. Therefore, a dispute involving a commercial property insurance claim, regardless of its monetary value, would not be handled by the ICCB.

This question tests the understanding of the ‘fit and proper’ requirement for insurance brokers, which is a fundamental aspect of their licensing and ongoing supervision. The Insurance Authority (IA) mandates that all insurance brokers must be fit and proper to operate. This assessment considers various factors beyond just technical qualifications, including integrity, financial soundness, and adherence to regulatory standards. While professional indemnity insurance and maintaining proper books are crucial operational requirements, they are components that contribute to demonstrating fitness and properness, rather than being the sole definition of it. The ability to secure a license is a prerequisite, not the ongoing state of being fit and proper.

The Code of Conduct for Insurers, established by the Hong Kong Federation of Insurers (HKFI), specifically addresses the standards expected in the insurance industry, particularly concerning personal insurance for Hong Kong residents. It covers a broad spectrum of practices, including underwriting, claims handling, product knowledge, and customer rights. While the Insurance Companies Ordinance (ICO) sets out regulatory requirements for insurers’ financial stability and governance, and the Code of Practice for the Administration of Insurance Agents details intermediary conduct, the Code of Conduct for Insurers is the primary document that outlines the expected ethical and professional standards for insurers themselves in their dealings with policyholders, encompassing aspects like fair claims processing and clear communication about policy terms.

The provided text emphasizes that customer service is no longer a discretionary element but a fundamental expectation. A “take it or leave it” approach, as described, is detrimental and leads to negative consequences. These consequences include loss of business due to increased customer awareness of their rights to courteous and efficient service, reduced support from insurance intermediaries who need to trust their principals’ service quality, damage to the company’s market prestige and the industry’s reputation, and potential government intervention if poor service impacts Hong Kong’s standing as a financial center. Therefore, a proactive and quality-focused approach to customer service is essential for business continuity and reputation management.

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.

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 insurer has a legal obligation to recover the certificate if the policy is cancelled, highlighting its critical legal role. Therefore, while it confirms compulsory cover, it does not provide a summary of the policy’s specific terms or benefits.

The question tests the understanding of specific exclusions in third-party liability cover for commercial vehicles, as distinct from private car policies. The ‘tool of trade’ clause specifically excludes damage caused when a vehicle is used as a functional tool, such as a mechanical digger performing its digging function. While compulsory insurance laws mandate third-party cover, this exclusion applies to the *scope* of that cover beyond the statutory minimums. Food poisoning claims are also excluded if the vehicle is a food vendor, and damage to stock-in-trade or specific equipment on the vehicle is also excluded. Damage to roads due to vibration or weight is another specific exclusion. Therefore, the use of a vehicle as a tool of trade, when not mandated by statutory provisions for compulsory insurance, is a key exclusion.

This question tests the understanding of exclusions in engineering insurance, specifically Boiler Explosion Insurance. The provided text states that risks normally insurable by other policies, such as fire and extra perils, are excluded from Boiler Explosion Insurance. This is to prevent duplication of coverage and ensure that each policy covers distinct risks. Therefore, a fire that occurs during a boiler explosion would typically be covered by a separate fire insurance policy, not the boiler explosion policy.

A Certificate of Insurance serves as a formal confirmation of the existence of compulsory insurance, particularly in contexts like motor vehicle insurance. It is a standalone document, distinct from the main policy, providing evidence of coverage. While it confirms coverage, it does not typically detail the specific terms and conditions of the underlying policy, nor does it represent a guarantee of payment from the insurer in the event of a claim. Its primary function is to satisfy legal requirements for proof of insurance.