Paper 2 General Insurance Quiz 67

Moral hazard refers to the increased likelihood of a loss occurring because an individual is insured. It’s often linked to the ‘human element,’ encompassing attitudes and behaviours. While dishonesty (including fraud) is a direct manifestation, carelessness, unreasonableness (like inflexibility or opinionated views that create problems), and negative social behaviour (such as vandalism) are also considered forms of moral hazard. These behaviours, even if not outright fraudulent, can increase the probability or severity of a claim, thus representing a poor moral hazard from the insurer’s perspective.

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 distinguishes it from insurance products that typically indemnify against loss or damage. While both involve financial commitments, the Performance Bond’s primary purpose is contractual assurance of performance, not risk transfer in the traditional insurance sense.

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.

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 is a key exclusion that limits coverage when a vehicle is used as a piece of equipment for a business, such as a mechanical digger performing its primary function. While compulsory insurance laws mandate certain third-party cover, this specific use case falls outside the standard scope of voluntary third-party liability for commercial vehicles, unless explicitly covered or required by statute. The other options represent different types of exclusions or are not typically exclusions in this context.

The scenario highlights the importance of the insured’s duty to notify the insurer of a potential claim as soon as reasonably possible. While the insured in the first case reported the claim within 20 days, the repair had already been completed, hindering the insurer’s ability to investigate the cause and extent of 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 demonstrates a stricter interpretation. The insured failed to report an accident within the stipulated 30 days, and the Complaints Panel upheld the insurer’s rejection, citing both the breach of the policy condition and the prejudice caused by the delay. The key distinction lies in the panel’s assessment of prejudice and the contractual intention behind the notification clause. In the second case, the delay was deemed significant enough to justify the rejection, especially as the insured’s argument about a previous claim settlement was dismissed as irrelevant. The principle that a breach of a notification clause can lead to claim rejection, particularly when it prejudices the insurer’s investigation, is central to this case. The question tests the understanding that while a delay might be excused in some circumstances (as in the first case, with mitigating factors), a clear breach coupled with demonstrable prejudice, as seen in the second case, can indeed lead to the denial of a claim, irrespective of the claim’s validity.

The scenario describes an individual intentionally engaging in a physical 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 question tests the understanding of policy conditions, specifically the ‘average’ clause. 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 is valued at HK$1,000,000, but only insured for HK$500,000. The loss is HK$200,000. Applying the average clause, the insurer will pay (HK$500,000 / HK$1,000,000) * HK$200,000 = HK$100,000. The remaining HK$100,000 is the uninsured portion due to under-insurance.

The core principle of an indemnity policy is to restore the insured to their pre-loss financial position. When new parts replace old, worn-out parts, the insured is placed in a better position (betterment). The insurer is entitled to deduct a portion of the repair cost to account for this betterment, reflecting the improved condition of the vehicle. The policy’s exclusion of depreciation implies that the insurer will not deduct for the normal wear and tear of the old parts. However, this does not negate the principle of betterment. The insurer’s calculation of a 35% betterment contribution for an eight-year-old vehicle, considering a standard depreciation rate of 50% for such vehicles, was deemed reasonable by the Complaints Panel. This means the insured is expected to contribute to the cost of the new parts to the extent that they improve the vehicle beyond its pre-accident condition, even after accounting for the fact that the old parts were depreciated.

The question probes the understanding of prohibited practices in the insurance intermediary sector, specifically concerning rebating. Rebating, in this context, refers to offering inducements or benefits to policyholders or potential policyholders that are not explicitly stated in the policy contract. This practice is considered unethical and potentially illegal because it distorts the true cost of insurance, undermines fair competition, and can be a form of bribery or corruption. The Insurance Companies Ordinance (Cap. 41) and related codes of practice, such as the Code of Practice for the Administration of Insurance Agents, aim to prevent such activities. Offering a portion of the commission to an employee of the insured without the insured’s explicit written consent falls under this prohibition, as it constitutes an unauthorized benefit and a deviation from the principle of honest reward for services rendered. This practice can compromise the integrity of the insurance transaction and create an unfair advantage.

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. However, for partial losses, the principle of strict indemnity applies, meaning the payout will be based on the actual loss incurred, not the agreed value. This is a key characteristic of agreed value policies for high-value, unique items where market value can fluctuate significantly or be difficult to ascertain.

The scenario describes a situation where an insured party, after experiencing a fire loss, fails to take reasonable steps to protect the damaged property from further deterioration, such as preventing water damage to electrical components. This directly contravenes the insured’s duty to minimize loss, which is a common law obligation and often explicitly stated in policy conditions. Failing to take such reasonable care can lead to the insurer reducing the claim amount or even rejecting it, as the additional damage could have been avoided. Admitting liability to a third party without the insurer’s consent, failing to provide proof of loss, or not disclosing other insurances are also duties of the insured, but they are not the primary breach in this specific scenario. The core issue is the failure to mitigate further damage to the insured property.

The scenario describes a situation where an insurer has consistently accepted late premium payments without objection. This pattern of conduct suggests that the insurer is choosing not to enforce the strict contractual requirement of timely premium payment. This voluntary relinquishment of a known right, demonstrated through consistent action, is the essence of waiver. Estoppel, while related, requires the insured to have reasonably relied on this conduct to their detriment. While reliance might be implied, the core principle demonstrated by the insurer’s actions is waiver of the punctuality clause.

An insurance broker acts as an agent for the proposer, meaning they are legally identified with the client. This agency relationship imposes a duty of utmost good faith. If a broker withholds or misrepresents material facts, this breach of good faith is imputed to the proposer. This means the insurer can treat the policy as void from the beginning because the foundation of the contract (accurate disclosure of material facts) was compromised. Option B is incorrect because while a broker’s negligence might lead to a claim against them, it doesn’t negate the fundamental principle of utmost good faith impacting the policy itself. Option C is incorrect as the broker’s primary duty is to the proposer, not the insurer, in terms of disclosure. Option D is incorrect because while insurers do conduct due diligence, the broker’s failure to disclose material facts directly impacts the validity of the contract due to the breach of utmost good faith.

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 insured person’s ability to perform their usual occupation is partially restored, but not fully. The insurer’s decision to classify the latter part of the recovery period as Temporary Partial Disablement (TPD) is based on the medical assessment that the insured’s range of trunk movement had improved significantly, allowing them to perform some duties. This aligns with the policy’s provision for different benefit amounts for Temporary Total Disablement (TTD) and TPD, where TPD applies when an insured can perform some but not all of their usual work. The Complaints Panel’s decision to uphold the insurer’s classification for the period from May 15th to July 15th, 1999, indicates that the medical evidence supported a partial return to work capacity, even if the insured still experienced some residual symptoms.

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 when making forcible and violent entry or exit. This damage is not subject to a separate sum insured but is covered as part of the overall policy for stock and specified contents. Therefore, while the primary focus is on the stolen goods, the policy also extends to cover the damage to the building’s security defenses incurred during the act of theft or attempted theft.

The scenario describes a situation where the insured delayed notifying the insurer about a claim. The policy likely contains a condition requiring prompt notification. While the insured took the watch for repair immediately, the claim submission to the insurer occurred two weeks after the repair was completed. This delay in reporting the incident to the insurer, even if the repair was prompt, could be a breach of the policy’s notification clause, which is a condition precedent to the insurer’s liability. The insurer is responsible for proving that an exclusion applies if they wish to deny a claim based on it, but the insured must also comply with express contract terms, including claims procedures. Therefore, the insurer might be able to deny the claim due to the late notification.

The question tests the understanding of what constitutes a material fact that an applicant must disclose to an insurer. According to insurance principles, a material fact is one that would influence the judgment of a prudent underwriter in deciding whether to accept the risk and on what terms. Storing highly flammable materials like petrol in a residential property, even if not explicitly asked about, would significantly increase the fire risk beyond what a standard underwriter would anticipate for a typical home. This directly impacts the insurer’s decision-making process regarding insurability and premium calculation, thus qualifying as a material fact. Options B, C, and D describe facts that are either common knowledge (typhoons in Hong Kong), beneficial to the insurer (sprinkler system), or something the insurer is expected to know (standard occupational hazards), and therefore do not need to be proactively disclosed.

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 are protected by requiring all vehicle owners to have a minimum level of insurance coverage for third-party bodily injury and property damage. The Motor Insurers’ Bureau of Hong Kong (MIB) plays a crucial role in fulfilling the intentions of this compulsory insurance by providing a safety net where such insurance might be unavailable or ineffective, but the ordinance itself is the foundational legal requirement.

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 (b) is incorrect because while exclusions exist, the fundamental principle is broad coverage. Option (c) is incorrect as ‘all risks’ does not imply coverage for intentional acts by the insured. Option (d) is incorrect because the insurer must prove an exclusion, not the insured.

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 insurer rejected the claim because the injury did not arise out of and in the course of employment, which is a fundamental condition for coverage under both the ECO and common law employer’s liability. Therefore, the insurer’s rejection is based on the policy’s coverage scope, not on a specific exclusion clause that would typically relate to contractual liability, employees of contractors, or standard exclusions like war risks. The scenario implies the core coverage trigger was not met.

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 related to a claim, fitting the definition of a condition precedent to liability. Options B and C describe conditions that affect the contract’s commencement or its continuation, respectively, and are therefore incorrect. Option D describes a warranty, which is a different category of contract term.

The scenario describes an individual intentionally engaging in a physical 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 that the insured’s own actions directly led to the harm in a foreseeable manner.

The Code of Conduct for Insurers, established by the Hong Kong Federation of Insurers (HKFI), specifically addresses the expected standards of good insurance practice for personal insurance policies sold to individual policyholders residing in Hong Kong. It covers a broad spectrum of practices, including underwriting, claims handling, product understanding, customer rights, and advising/selling practices. While the Insurance Companies Ordinance (ICO) sets out foundational requirements for insurers’ authorization and financial stability, 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 industry’s self-regulatory standards for direct interactions with policyholders concerning the quality of service and ethical practices in personal insurance.

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 caused by 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 to the claimant in this specific situation.

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 calculation. ‘Salvage (Non-Marine)’ refers to the residual value of damaged property after a claim, which is relevant to the claims process, not the initial premium setting. ‘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.

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 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 often used in motor insurance to facilitate vehicle registration and serves as proof of legally required insurance. While it provides unconditional cover, it typically includes cancellation provisions and is intended for a short duration, to be replaced by a formal policy. The question tests the understanding of the primary function and nature of a cover note in the underwriting process, distinguishing it from a policy or a certificate of insurance.

The Employees’ Compensation Ordinance (ECO) mandates compulsory insurance for employers to cover their liability for employee injuries or deaths arising out of and in the course of employment. While the ECO covers accidents, it does not typically cover liabilities arising from breaches of contract or liabilities to employees of contractors. Product liability insurance, on the other hand, covers a manufacturer’s or seller’s duty of care to consumers regarding defective products, with coverage generally applying to incidents occurring off the insured’s premises. Therefore, an insurer would correctly reject a claim under an EC policy if the injury was not a result of an accident within the scope of employment as defined by the ECO, or if it fell under a policy exclusion like liability to contractors’ employees or contractual liability.

The question tests the understanding of the core components typically found in a company’s published declaration of customer service standards. These declarations are designed to outline the company’s commitment to its clients and stakeholders. Option (a) correctly identifies the commitment to quality and service as a fundamental element. Option (b) refers to professional standards, which is also a common inclusion. Option (c) highlights efficiency and ethical business practices, another key aspect. Option (d) focuses on claims handling, a critical service promise. The provided text emphasizes that these declarations are not just self-imposed but can also be mandated by industry bodies or legislation, reinforcing their importance in demonstrating declared intentions and measuring performance.