Paper 2 General Insurance Quiz 55

This question assesses the understanding of the positive outcomes of excellent customer service in the insurance industry. The provided text highlights that happy customers not only remain loyal but also become a valuable source of new business through recommendations and word-of-mouth. This ‘customer productivity’ directly contributes to business growth and is a key benefit of prioritizing customer satisfaction. Options B, C, and D, while potentially related to good business practices, do not directly capture this specific positive outcome as described in the syllabus.

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. It is funded partly by a levy on insurance premiums. Therefore, if an employer fails to secure the mandatory insurance, the ECAS steps in to ensure employees receive compensation for work-related injuries or diseases, fulfilling the spirit of the Employees’ Compensation Ordinance.

Average adjusters are specialized professionals in marine insurance, particularly for General Average (GA) claims. Their expertise is crucial due to the complexity of GA, which involves international maritime law, potentially hundreds of interested parties (like cargo owners), and lengthy investigation periods that can span years. While Lloyd’s Agents and Loss Adjusters are also involved in claims, their roles differ. Lloyd’s Agents often act as survey agents for marine underwriters, and Loss Adjusters are more commonly used in non-marine general insurance claims handled by the insurer’s own staff. Average adjusters’ deep understanding of legal intricacies and the management of numerous stakeholders makes them indispensable for GA.

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. While other options relate to insurance, they do not specifically address the foundational legal requirement for third-party coverage in motor vehicle use within Hong Kong.

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.

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, irrespective of whether specific questions are asked. Therefore, facts that impact an underwriter’s assessment of insurability or the terms of the policy are considered material.

The question tests the understanding of how premiums are calculated in general insurance, specifically focusing on the concept of risk discrimination. Risk classification assigns risks to broad categories with pre-determined average rates. Risk discrimination, however, involves adjusting these rates based on the specific characteristics of an individual risk within that category. The example of two private warehouses in the same building, one in the basement (higher risk) and one on the second floor (average risk), illustrates this principle. The underwriter would apply a premium loading to the basement risk due to its higher perceived risk, while the second-floor risk might receive the standard rate for a private warehouse. This process of differentiating within a class is known as risk discrimination, not risk classification (which is the initial broad grouping) or premium base variation (which refers to the factor used for calculation, like sum insured or turnover).

The question tests the understanding of the legal significance of a certificate of compulsory insurance, particularly in motor insurance, as mandated by law. While a cover note provides a summary, a certificate of compulsory insurance, as prescribed by the relevant ordinance, merely confirms the existence of the legally required insurance. It does not detail the policy’s scope (e.g., Comprehensive vs. Act Only). The critical point is that its issuance is a legal requirement, and failure to issue one is a criminal offense. The insurer has a legal obligation to recover the document if the policy is cancelled, highlighting its importance as proof of compliance with compulsory insurance laws, rather than a comprehensive policy summary.

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 within a specified period.

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 all circumstances. Its primary function is to satisfy legal requirements for mandatory insurance.

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 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 in commercial vehicle insurance and is mandated by statutory provisions regarding compulsory insurance, meaning it applies unless the law requires otherwise for compulsory third-party 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 law for compulsory insurance, is a primary exclusion.

The question probes the understanding of the ethical implications of rebating in the context of insurance sales, specifically how it can be construed as bribery or corruption. Rebating, which involves offering a portion of the commission or premium back to the policyholder, fundamentally distorts the principle of fair pricing and compensation. When this practice is extended to employees of the insured entity without proper authorization, it can create a conflict of interest and potentially influence purchasing decisions based on personal gain rather than the merits of the insurance product. This practice undermines the integrity of the insurance intermediary’s role and can be seen as an inducement, akin to a bribe, to secure business. The Code of Practice for the Administration of Insurance Agents and the minimum requirements of the Model Agency Agreement explicitly prohibit such actions to maintain a transparent and ethical marketplace. Therefore, rebating, particularly when it involves undisclosed benefits to individuals associated with the insured, is considered a form of corruption as it corrupts the fair and honest establishment of business relationships and rewards.

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 and readily available. Failing to keep separate client accounts is a breach of regulatory requirements and can lead to disciplinary action. The other options describe general good business practices or requirements for principals, but not the specific mandate for handling client premiums.

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.

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.

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 because these risks are typically covered under a separate fire insurance policy, preventing duplication of coverage and ensuring that each policy covers its intended scope. Therefore, a fire that causes damage to a boiler would generally be handled by a fire policy, not the boiler explosion policy.

This question tests the understanding of the specific exclusions within a Product Liability policy. Option (a) correctly identifies that liability stemming from the inherent design or formulation of a product, such as a TV cabinet unable to support a weight exceeding its specified limit, is typically not covered. Options (b), (c), and (d) describe situations that are generally covered or are not standard exclusions in a Product Liability policy. For instance, liability for property damage caused by a defective product (like the car in the CD player example) is usually within the scope of cover, and claims from bystanders are also generally included. Contractual liability, while often excluded, is a different category than design flaws.

This question tests the understanding of how changes in the insured risk can impact the policy. The Insurance Companies Ordinance (Cap. 41) and general insurance 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. Option B is incorrect because while a change in market conditions might influence underwriting, it doesn’t directly grant the insurer the right to cancel based on a worsened risk. Option C is incorrect as the insurer’s marketing philosophy is a business decision, not a basis for policy cancellation due to risk alteration. Option D is incorrect because while an insurer might seek expert advice during initial assessment, it doesn’t directly relate to the right to cancel due to a subsequent worsening of the risk.

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 common practice for high-value, unique items where market value can fluctuate significantly or be difficult to ascertain.

The scenario describes an individual who intentionally participates in a violent altercation with the aim of rescuing friends. The Complaints Panel determined that the insured’s injury was not accidental because it was a foreseeable consequence of his deliberate actions in joining the fight. The key principle here is that an injury is considered accidental only if it is unforeseen and unintentional. By actively engaging in a situation where he could reasonably anticipate being attacked, the insured’s actions removed the event from the realm of pure accident, aligning with the insurer’s rejection of the claim based on the nature of the incident.

The Code of Conduct for Insurers in Hong Kong is designed to promote good insurance practice and protect policyholders. It covers a broad spectrum of insurer conduct, including their interactions with customers and their operational responsibilities. Specifically, it addresses how insurers should handle underwriting and claims processes to ensure fairness and efficiency. It also explicitly outlines the rights and obligations of customers, ensuring they are informed and treated equitably. Furthermore, the Code emphasizes the importance of safeguarding customers’ overall interests, which encompasses their rights and well-being throughout the insurance lifecycle. While a good corporate image is desirable, the Code’s primary focus is on the direct conduct of insurance business and customer protection, rather than the broader concept of public image as a corporate citizen.

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 acquisition through referrals. Options B, C, and D, while potentially related to good business practices, are not the primary positive outcomes directly linked to customer satisfaction and loyalty in the context of generating new business through customer advocacy as described.

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 that ought to have been known by the insured at the time of policy inception. This is to prevent individuals from obtaining insurance coverage for known risks or past misconduct. Option A correctly identifies this exclusion. Option B is incorrect because while D&O policies cover wrongful acts, the exclusion for known circumstances overrides this general coverage. Option C is incorrect as the policy generally covers legal expenses for defense, but this is contingent on the claim itself being covered, which it is not in this case due to the prior knowledge. Option D is incorrect because while dishonesty is a common exclusion, the primary reason for denial in this scenario is the prior knowledge of the circumstance, which is a distinct exclusion.

The scenario describes an individual who intentionally intervenes in a violent altercation to rescue friends. The Complaints Panel determined that the insured’s injury was not accidental because it was a foreseeable consequence of his deliberate actions in joining the fight. The key principle here is that for a personal accident claim, the injury must be the result of an unforeseen and unintentional event. By actively participating in a dangerous situation, the insured’s actions led to a predictable outcome of being injured, thus negating the ‘accidental’ nature of the event as required by personal accident policies. The insurer’s rejection was based on the injury not being accidental, which aligns with the panel’s finding.

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. It is funded partly by a levy on insurance premiums. Therefore, if an employer fails to secure the mandatory insurance, the ECAS steps in to ensure employees receive compensation for work-related injuries or diseases, fulfilling the spirit of the compulsory insurance requirement.

The question tests the understanding of how premiums are determined in Personal Accident (PA) insurance, specifically referencing the provided text. The text explicitly states that while individual features like age might have underwriting consequences, the standard premium calculation is primarily based on the insured’s occupation, which is classified according to accident risk. Other factors like gender are mentioned as not affecting the premium if other conditions are equal. Therefore, occupation is the primary basis for premium calculation in this context.

Institute Cargo Clauses (ICC) (A) provides the broadest coverage for own damage, operating on an ‘All Risks’ basis. This means it covers all perils except those specifically excluded. ICC (B) and ICC (C) are more restrictive, covering only specified risks. Banks often require ICC (A) for cargo shipments when providing financing or guarantees because its comprehensive nature offers greater protection against unforeseen events, aligning with their need for robust security.

This question tests the understanding of the core principle of ‘All Risks’ insurance, which is that it covers all losses unless specifically excluded. The insurer bears the burden of proving that an exclusion applies. Option (a) correctly states this principle. Option (b) is incorrect because ‘All Risks’ does not inherently mean no exclusions; it means coverage is broad but still subject to defined exclusions. Option (c) is incorrect as the insured does not need to prove the cause of loss; the insurer must prove an exclusion applies. Option (d) is incorrect because while the scope is wide, it is not unlimited and is defined by the policy’s exclusions.

Institute Cargo Clauses (ICC) (A) provides the broadest form of ‘all risks’ coverage for the insured cargo. ICC (B) and ICC (C) offer coverage for a more restricted list of specified perils. The scenario describes a situation where cargo is damaged due to a fire that originated from a faulty electrical system within the cargo itself, which is a form of inherent vice. Inherent vice is a standard exclusion across all Institute Cargo Clauses. However, ICC (A) is the only clause that would potentially cover damage caused by fire, even if the proximate cause is an excluded peril like inherent vice, provided the fire itself is considered a covered peril under the ‘all risks’ wording. ICC (B) and (C) would not cover this as fire is not listed as a specified peril in the same way as under (A), and the inherent vice exclusion would be more strictly applied. Therefore, ICC (A) is the most appropriate cover for this situation, as it is the most comprehensive and would likely encompass the fire damage, despite the underlying inherent vice.