Paper 2 General Insurance Quiz 52

Under the Motor Vehicles Insurance (Third Party Risks) Ordinance, compulsory third-party insurance for vehicles is mandated. While standard policies for private cars have certain exclusions, commercial vehicles, particularly those used as a ‘tool of trade’ (like a mechanical digger in its operational capacity), have specific exclusions that differ from private car policies. The ‘tool of trade’ clause exempts the insurer from liability for damage arising from the vehicle’s use in its primary function as a tool, unless such use is required by statutory provisions for compulsory insurance. Food poisoning claims and damage to stock-in-trade are also specific exclusions for commercial vehicles used in certain capacities, such as mobile food vendors. Damage to roads or weighbridges due to the vehicle’s weight or vibration is another distinct exclusion for commercial vehicles.

This question tests the understanding of how an excess works in motor insurance, specifically the difference between a voluntary and a compulsory excess, and how they interact. A voluntary excess is chosen by the policyholder to reduce the premium, while a compulsory excess is imposed by the insurer. Standard policy excesses are a type of compulsory excess that applies universally or to specific risk factors without a premium discount. In this scenario, the policyholder chose a voluntary excess of HK$5,000. The insurer then imposed a compulsory underwriting excess of HK$2,000 due to the vehicle’s high performance. Standard policy excesses, by definition, are always in parallel with other excesses and do not qualify for premium discounts. Therefore, the total excess applicable to the claim would be the sum of the voluntary excess and the compulsory underwriting excess, which is HK$7,000. The explanation clarifies that standard policy excesses are a separate category of compulsory excess and would be applied in addition to the voluntary and underwriting excesses if they were also present, but in this case, only voluntary and underwriting excesses are mentioned as being applied. The key is that standard policy excesses are a type of compulsory excess and are applied in parallel with other excesses.

This question assesses 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 that client assets are protected in case of the broker’s financial difficulties. This is a fundamental aspect of financial prudence and client protection within the insurance broking industry, as outlined in the ‘Minimum Requirements’ for insurance brokers.

The question probes the understanding of the ethical implications of rebating in the context of insurance sales, specifically how it can be construed as a form of bribery or corruption. Rebating, which involves offering a portion of the commission back to the policyholder, fundamentally distorts the pricing and underwriting process. It undermines the principle of fair compensation for the intermediary and can lead to the selection of less suitable policies based on financial incentives rather than genuine need. This practice, when offered to employees or associates of the insured without proper authorization, can be seen as an inducement to secure business, thereby blurring the lines between legitimate sales practices and unethical inducements, which aligns with the definition of bribery and corruption in a commercial context. The Code of Practice for the Administration of Insurance Agents and the Minimum Requirements of the Model Agency Agreement explicitly prohibit such practices to maintain market integrity and consumer trust.

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 rather than declining the entire policy. This is achieved through a ‘specially worded exclusion’ or an endorsement that carves out the problematic element. Option (a) accurately describes this practice of tailoring coverage by excluding specific risks while allowing the rest of the policy to remain in force. Option (b) is incorrect because while insurers can limit coverage, the term ‘endorsement’ typically refers to an addition or modification, not solely an exclusion. Option (c) is too broad; while market exclusions exist, the scenario describes a specific, tailored exclusion for an individual policy. Option (d) is incorrect as it describes a general principle of insurance law (utmost good faith) rather than a mechanism for managing specific risks within a policy.

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 continuing obligation and is particularly important at renewal when new information may be relevant. Statement (ii) is also correct; 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 true as insurers have a duty to inform policyholders if they do not intend to renew, 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 the policy contract and regulatory requirements; the insurer can propose new terms, but the insured is not obligated to accept them, and the insurer cannot unilaterally impose new terms without agreement. Therefore, statements (i), (ii), and (iv) are the accurate assertions regarding general insurance policy renewals.

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 marked would lead to a claim being accepted for damage to it.

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, unexpected mechanical breakdown of the refrigeration unit during transit, provided it’s not an excluded peril.

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.

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 as part of a valid claim, the initial appointment and payment usually fall to the assured. This contrasts with non-marine loss adjusters, who are more commonly appointed and paid by the insurer.

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 and proper notice is given. 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 a change in market conditions might influence underwriting strategy, it doesn’t automatically grant the right to cancel a policy due to a change in the insured’s circumstances. Option C is incorrect as a policyholder’s financial difficulties, while potentially a moral hazard, do not inherently alter the physical or operational circumstances of the insured risk itself in a way that directly triggers cancellation based on the described principle. Option D is incorrect because while an insurer might review policy terms periodically, a specific change in the insured’s risk for the worse is the direct trigger for potential cancellation under the principle described.

The question tests the understanding of the ‘Forcible and Violent Entry’ condition in theft insurance. This condition is a standard requirement for a valid claim under commercial theft policies, meaning that for the insurer to cover a loss due to theft, there must be evidence of forced entry or exit from the premises. Without this evidence, the claim may be invalidated. The other options represent different insurance concepts: ‘Franchise’ relates to the deductible amount that the insured must bear before the insurer pays, ‘Fraud’ involves dishonest acts by the insured, and ‘Fundamental Risks’ are those with potentially catastrophic loss potential that are often excluded.

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.

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 ingress. 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 a cargo shipment experiencing damage due to a collision between the carrying vessel and another ship. Under ICC (A), this would be covered as an ‘all risks’ peril. Under ICC (B), collision is a specifically listed peril, thus it would also be covered. ICC (C) also covers damage arising from collision. Therefore, all three clauses would provide coverage for damage resulting from a collision, assuming no exclusions apply.

Moral hazard refers to the increased likelihood of a loss occurring due to the behavior of the insured party. This behavior can stem from various factors, including dishonesty, carelessness, unreasonableness, or negative social conduct. While dishonesty and fraud are direct manifestations of moral hazard, carelessness, which can lead to losses or accidents, also falls under this umbrella. Unreasonableness, characterized by opinionated views and inflexibility, can create significant problems and increase risk. Social behavior, such as vandalism, is another aspect that contributes to moral hazard. Therefore, all these elements are considered facets of moral hazard, representing the ‘human element’ that influences risk.

The Code of Conduct for Insurers in Hong Kong is designed to promote good insurance practice and protect policyholders. It addresses various aspects of an insurer’s operations to ensure fair treatment and transparency. Specifically, the Code covers the insurer’s responsibilities towards customers, including their rights and interests, and also sets standards for underwriting and claims handling processes. While an insurer’s public image as a corporate citizen is important, the Code’s primary focus is on the direct conduct of insurance business and the protection of policyholders’ rights and interests within that context. Therefore, the industry’s public image as a good corporate citizen, while a desirable outcome, is not a direct area explicitly outlined as a covered topic within the Code’s operational standards.

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. Clauses (B) and (C) would likely not cover this unless ‘damage by waves’ was explicitly listed as a covered peril, which is uncommon for these more limited clauses.

The scenario describes an individual injured while ice-skating. The insurer denied the claim based on a policy 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 indoor or outdoor. Therefore, ice-skating, even indoors, falls under this category. The key principle here is the broad interpretation of exclusion clauses by the panel to cover activities that are inherently associated with winter conditions, even if not strictly performed during winter or in a traditional winter setting. This aligns with the understanding that policy exclusions are often interpreted in favour of the insurer when the activity’s nature aligns with the exclusion’s intent, even if the wording isn’t perfectly precise.

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 physical damage is not covered by a material damage policy, or if that policy is invalid, then the BI policy will not respond to the loss of profit or increased expenses resulting from the event. This prevents the BI policy from being used to cover losses that should have been covered by the material damage insurance, thereby avoiding an extended period of interruption being solely compensated by the BI policy.

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 complexities of GA, and sometimes for complicated hull or cargo losses, distinguishing them from the more general roles of the others.

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 of cover for maintaining personal protection after employment termination.

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 goes beyond mere technical qualifications and encompasses 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 overarching criterion itself. Similarly, adherence to a code of conduct is a manifestation of being fit and proper, but not the primary definition of it.

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 they are already registered elsewhere. This aligns with the principle of ensuring that commercial activities within Hong Kong’s jurisdiction are properly accounted for. Option (b) is incorrect because pleasure craft are specifically mentioned as requiring registration. Option (c) is incorrect as fishing vessels regularly operating in or using Hong Kong waters as a base are also subject to registration requirements. Option (d) is incorrect because vessels registered in Mainland China or Macau that trade to Hong Kong and hold specific certificates are generally exempt from Hong Kong registration, provided those certificates are accepted.

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 not marked correctly leads to its exclusion from the policy’s coverage.

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 a rogue wave was explicitly listed as a covered peril, which is highly unlikely. The question tests the understanding of the hierarchical coverage levels of the Institute Cargo Clauses.

This question tests the understanding of the specific definition of ‘loss of one limb’ within the context of personal accident insurance, as illustrated by Case 12. The scenario highlights that a fracture causing functional impairment, but not physical severance at or above the wrist or total functional disablement, does not meet the policy’s strict definition for this benefit. The explanation clarifies that the Complaints Panel upheld the insurer’s decision because the insured’s condition, while inconvenient, did not align with the policy’s precise wording for ‘loss of one limb’ or ‘total functional disablement’. It also notes the absence of provisions for proportional compensation for partial permanent disability in the policy.

The ‘Schedule’ section of a scheduled policy form is specifically designed to house all information pertinent to the individual risk being insured. This includes details such as the policy number, the insured’s particulars, coverage limits, effective dates, a description of the insured item or risk, the premium paid, and any specific 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 of cover and perils insured. General Exceptions apply to the entire policy, not just specific sections. Therefore, identifying the policy number falls under the purview of the Schedule.

This question assesses the understanding of the positive outcomes of excellent customer service in the insurance industry, as outlined in the provided text. The text explicitly states that happy customers not only remain loyal but also become a ‘productive source of extra business’ through recommendations and word-of-mouth advertising. This directly translates to increased business generation via referrals. Options B, C, and D, while potentially related to good business practices, are not the primary positive outcomes directly emphasized in the context of customer ‘productivity’ as described in the syllabus material. Increased profitability is a consequence of reduced complaints and retained business, not the direct definition of customer productivity. Enhanced market prestige is a broader benefit, and reduced operational costs are a result of efficiency, not the direct output of customer productivity.

The question tests the understanding of the scope of theft insurance, specifically concerning damage to the premises during an attempted theft. The provided text states that theft policies typically include damage caused by thieves to the insured premises during forcible and violent entry or exit. This damage is not subject to a separate sum insured but is covered under the general policy for stock and specified contents. Therefore, if a thief breaks a window to gain entry, the cost of replacing that window would be covered as part of the theft insurance, provided it was a necessary action for entry or exit.

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. This exclusion is a key differentiator for commercial vehicle insurance and is mandated by statutory provisions regarding compulsory insurance, meaning it applies unless the law requires otherwise for compulsory cover. Food poisoning claims and damage to stock-in-trade are also specific exclusions for certain commercial uses, and damage to roads due to vehicle weight is another distinct exclusion. Therefore, the use of a vehicle as a tool of trade, unless mandated by compulsory insurance law, is a primary exclusion.