Paper 2 General Insurance Quiz 58

Moral hazard refers to the increased likelihood of a loss occurring due to the insured’s behavior or attitude, often stemming from a reduced incentive to prevent the loss because of the insurance coverage. While dishonesty (fraud) is a severe manifestation, carelessness, unreasonableness (inflexibility), and negative social behavior (like vandalism) are also recognized forms of moral hazard. These behaviors, even if not outright fraudulent, can significantly increase the probability or severity of a claim, impacting the insurer’s risk assessment and pricing. The question tests the understanding that moral hazard encompasses a broader spectrum of human behavior beyond just outright dishonesty.

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 and fraud are extreme forms, carelessness, unreasonableness (like inflexibility or opinionated views), and negative social behaviour (such as vandalism) also contribute to moral hazard. The question asks to identify a behaviour that, while not inherently dishonest, can still lead to adverse outcomes due to the insured’s conduct. Unreasonableness, characterized by inflexibility and strong opinions, can lead to poor decision-making or resistance to safety measures, thereby increasing the risk of a claim, fitting the description of moral hazard.

A combined liability policy is designed to consolidate various liability coverages into a single document for convenience and potential premium savings. While it typically includes Public Liability, Products Liability, and Employees’ Compensation Liability, it can be extended to include other specific liability covers based on client needs. Directors’ and Officers’ Liability and Professional Liability are common additions that can be integrated into such a combined policy, reflecting the diverse risks faced by businesses. The other options are less comprehensive or misrepresent the core components of a combined liability policy. Property insurance and pecuniary insurance are distinct classes of insurance, and while they can be part of a broader ‘umbrella’ type cover, they are not the defining elements of a combined liability policy. An ‘umbrella’ policy is a broader concept that can encompass various risks, not solely liability.

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. Therefore, facts that impact an underwriter’s judgment on premium or acceptance are considered material.

This question tests the understanding of how contract terms are classified based on their timing of operation within an insurance contract. A ‘condition precedent to liability’ is a term that, if breached, does not void the entire contract but rather prevents a specific claim from being paid. The scenario describes a policy requiring the insured to report changes in their profession. Failure to do so, as stipulated, would mean the insurer is not liable for any claims arising from that unreported change, directly aligning with the definition of a condition precedent to liability. Option B describes a condition precedent to the contract, which must be met for the contract to even begin. Option C describes a condition subsequent, which, if it occurs, can terminate an existing contract. Option D is a misrepresentation, which is a type of statement made before or at the time of the contract, not a condition related to ongoing obligations or claims.

A combined liability policy is designed to consolidate various liability coverages into a single document for convenience and potential premium savings. While it typically includes Public Liability, Products Liability, and Employees’ Compensation Liability, clients may also opt for additional coverages like Directors’ and Officers’ Liability or Professional Liability. The key characteristic is the integration of these distinct liability risks under one policy framework, rather than separate, standalone policies for each risk. The question tests the understanding of what constitutes a combined liability policy by identifying the core components and the potential for additional coverages.

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 is attempting to prove it was due to a specific cause (a storm), which aligns with the burden of proof in a ‘Specified Perils’ policy. Therefore, the policy likely covers losses only when caused by perils explicitly mentioned.

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 discharge the insurer’s liability 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 lead to a claim refusal under this undertaking, even though technically the warranty is breached.

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, requiring the proposer to reveal all such information, irrespective of whether specific questions are asked. Failure to disclose a material fact, even if unintentional, can lead to the insurer voiding the policy. Therefore, the statement that a proposer must reveal all material facts, regardless of whether they are specifically asked, accurately reflects this legal obligation.

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 a history of compliance with relevant laws and regulations. While professional indemnity insurance and maintaining proper books are crucial operational requirements, they are specific manifestations of being ‘fit and proper’ rather than the overarching principle itself. Similarly, adherence to codes of conduct is a consequence of being fit and proper, not the primary criterion.

The core principle of an indemnity policy is to restore the insured to their pre-loss financial position. When new parts are used to repair an older vehicle, these new parts inherently offer a superior lifespan and condition compared to the original, worn-out parts. This improvement, often termed ‘betterment,’ places the insured in a financially advantageous position than they were immediately before the loss. Therefore, the insurer is entitled to deduct a contribution from the insured to account for this betterment, ensuring the insured does not profit from the claim. The scenario highlights that the insurer’s calculation of a 35% betterment contribution for an eight-year-old vehicle, while a standard depreciation rate might be higher (e.g., 50%), was deemed reasonable by the Complaints Panel, especially since the policy explicitly excluded depreciation. This means the insured is responsible for the portion of the new parts’ value that represents an improvement over the original parts’ depreciated state.

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 Scheduled Policy Form is a common structure where the policy details, such as the insured’s name, the property covered, the sum insured, and the premium, are listed in a schedule attached to the policy document. This schedule forms an integral part of the contract. The Signature Clause, also known as the Attestation Clause, is a specific section within this scheduled policy form where the insurer formally signifies their agreement and undertaking to the terms outlined in the policy. It is the insurer’s confirmation of their commitment.

This question tests the understanding of General Average (GA) acts and their consequences. A GA act involves a voluntary and reasonable sacrifice or expenditure to preserve the common adventure. When cargo is jettisoned (thrown overboard) to save the ship and other cargo during a peril, it constitutes a GA sacrifice. The owner of the jettisoned cargo is then entitled to a contribution from the other saved parties to compensate for their loss. The key is that the act must be extraordinary, voluntary, reasonable, and performed in a time of peril for the common safety. Option A correctly identifies the jettisoning of cargo as a GA sacrifice. Option B is incorrect because while a ship might be insured against damage, the act of jettisoning cargo itself isn’t a ‘salvage’ in the maritime sense of saving property from peril for an award, nor is it a ‘sue and labour’ charge which relates to preserving insured property from an insured loss. Option C is incorrect as ‘sue and labour’ charges are expenses incurred by the assured to preserve or minimize loss, not sacrifices made for the common adventure. Option D is incorrect because while the ship might be damaged, the act described is a sacrifice for the common good, not a direct expenditure to save the ship from a peril it is facing independently.

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. Without physical damage covered by the material damage policy, the BI policy will not respond to losses arising from the interruption. Therefore, if the material damage policy is invalid or does not cover the specific cause of the interruption, the BI claim will be rejected.

The scenario describes a situation where an insured person sustained an injury and received a certain number of days of temporary total disability benefit and temporary partial disability benefit. The insured was dissatisfied, believing they should have received the higher temporary total disability benefit for the entire duration. The Complaints Panel’s decision was based on the nature and severity of the injury, the insured’s occupation (self-employed director with primarily office duties), and the absence of complications. The panel determined that after eight days, the insured’s condition only met the definition of temporary partial disability, not temporary total disability, making the insurer’s offer appropriate according to the policy terms. This highlights the critical distinction between these two types of temporary disablement benefits in personal accident policies, where the ability to perform some but not all of one’s usual duties qualifies for partial disablement, while the inability to perform any duties qualifies for total disablement.

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.

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.

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. While compulsory insurance laws mandate certain third-party cover, this exclusion applies to the voluntary part of the policy for uses beyond basic road transit. Food poisoning claims and damage to stock-in-trade are also specific exclusions for certain commercial vehicle 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 statute for compulsory insurance, is a key exclusion.

This question tests the understanding of how an excess works in motor insurance. An excess is the amount the policyholder must pay towards a claim before the insurer covers the rest. In this scenario, the damage is HK$12,000 and the voluntary excess is HK$2,000. Therefore, the insured is responsible for the first HK$2,000 of the claim, and the insurer will pay the remaining HK$10,000. The question asks how much the insurer will pay, which is the total claim minus the excess.

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 is not conditional on the submission of a satisfactory proposal form later. While it offers unconditional cover, it typically includes cancellation provisions and is intended for a short duration, often replaced by a formal policy. Its primary function is to provide the insured with documentary proof of existing insurance, which can be crucial for various purposes, such as vehicle registration or satisfying lender requirements.

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, ‘Fraud’ concerns dishonest acts by the insured, and ‘Fundamental Risks’ are typically excluded due to their catastrophic potential.

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, collision, and water damage, but is more limited than ICC (A). ICC (C) offers even more restricted coverage, primarily for jettison and specific major casualties. The scenario describes damage from a collision, which is a specified peril covered under ICC (B) and ICC (A). However, ICC (A) is the most comprehensive and would cover this event. The question asks for the most appropriate cover given the bank’s requirement for comprehensive protection for their financial interest in the cargo, making ICC (A) the most suitable choice due to its ‘all risks’ nature.

The scenario describes a situation where an insured person sustained an injury and received a certain number of days of benefit. The insurer paid for a portion of the leave as temporary total disability (TTD) and the remainder as temporary partial disability (TPD). The insured disagreed, believing the entire period should be compensated as TTD. The Complaints Panel reviewed the case, considering the nature of the injury (contusion without fracture or nerve involvement), the insured’s occupation (self-employed director with primarily office duties), and the absence of complications. The panel concluded that after eight days, the insured should have been able to perform some of her duties, meaning her condition during the latter part of her sick leave met the definition of TPD, not TTD. Therefore, the insurer’s payment structure, differentiating between TTD and TPD benefits, was deemed appropriate according to the policy’s terms, which typically offer different benefit amounts for these two categories of disablement. This aligns with the principle that the classification of disablement (total vs. partial) depends on the insured’s actual inability to perform their usual work, not just the duration of sick leave.

The Employees’ Compensation Ordinance (ECO) mandates that employers must provide compensation to employees for injuries or death arising out of and in the course of employment. While the ECO provides a statutory framework for compensation, employers can also be liable under common law for negligence or breach of statutory duty related to workplace safety. Employees’ Compensation Insurance (ECI) policies typically cover both liabilities. However, the question specifies that the employer’s claim was rejected because the injury did not arise out of and in the course of employment, which is a fundamental condition for coverage under the ECO and, by extension, most ECI policies. Therefore, the insurer’s rejection is based on the policy’s intent to cover only employment-related liabilities as defined by the ECO, and the specific exclusion of injuries not meeting this criterion.

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 encountered or are aware of. Option B is incorrect because while dishonesty is an exclusion, the scenario doesn’t explicitly state dishonesty, and the focus is on 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 primary exclusion relevant to the scenario of pre-existing knowledge.

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. 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.

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 in the syllabus, distinguishing it from insurance policies that typically cover a broader range of risks and are not primarily guarantees of performance in this manner.

The ‘step-back system’ for No Claim Discount (NCD) in private car insurance, as described in the IIQE syllabus, dictates how a discount is adjusted after a claim. For drivers with an entitlement of four or more claim-free 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. 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.