Paper 2 General Insurance Quiz 70

A commercial motor policy designed for vehicles used in construction, such as those involved in digging, often contains specific exclusions. The ‘working operations clause’ is a common exclusion that removes cover when the vehicle is being used for its specialized functions that go beyond standard road transit, like excavation or lifting. This is to prevent the insurer from being liable for risks associated with the vehicle’s operational use as equipment, which typically requires different underwriting and policy terms. The other options are less relevant: a ‘business use clause’ generally relates to the type of business the vehicle is used for, a ‘tool of trade clause’ might relate to tools carried within the vehicle, and a ‘professional liability clause’ is typically associated with services provided by professionals, not the operation of machinery.

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, and since the policy excluded illnesses presenting signs or symptoms prior to commencement, the insurer’s decision was upheld. This aligns with the principle that insurance policies typically exclude coverage for conditions that were already present or manifesting before the policy’s effective date, even if not formally diagnosed. The difficulty in ascertaining the exact onset date is a common challenge in applying such exclusions, but the evidence of prior symptoms and the tumor’s likely growth period supported the insurer’s stance.

A ‘Condition Precedent to the Contract’ is a term that must be fulfilled for the insurance agreement to become effective. Failure to meet this condition means the contract never legally begins. In contrast, a ‘Condition Precedent to Liability’ relates to a term whose breach invalidates a specific claim, but the contract itself may still be 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, only potentially affecting claims or renewals. ‘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.

This question tests the understanding of the specific definition of ‘loss of one limb’ as typically applied in personal accident insurance, which is a common component of travel insurance. The scenario highlights that a fracture causing functional impairment, while inconvenient, does not meet the strict definition of ‘physical severance’ or ‘total functional disablement’ required by many policies for this particular benefit. The case emphasizes that without specific provisions for partial disability compensation, such claims are usually rejected if they don’t meet the defined criteria for total loss.

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.

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 HK$500,000, but the actual value at risk is HK$1,000,000. This means the property is under-insured by 50% (HK$500,000 / HK$1,000,000). The pro rata average condition stipulates that the claim payment will be reduced proportionally to the extent of under-insurance. Therefore, if a loss of HK$200,000 occurs, the payout will be 50% of this amount, resulting in HK$100,000. The explanation clarifies that this condition applies when the sum insured is less than the value at risk, and it serves to ensure that the insured carries a portion of the risk when under-insured. It also contrasts this with policies that use limits of liability based on floor area, which typically do not have this condition.

The scenario highlights the importance of timely notification of a potential claim. While the insured reported the damage within 20 days, the key issue is whether this constitutes ‘as soon as reasonably possible,’ especially after the repair had already been completed. The Complaints Panel acknowledged that the repair before investigation prejudiced the insurer. However, they gave the insured the benefit of the doubt due to the simplicity of the circumstances and the verification of damage through the repair slip and parts inspection. The remark suggests the panel did not view the pre-repair notification as a condition precedent to liability. In contrast, the second case clearly shows a breach of a specific time limit (30 days) and prejudice to the insurer, leading to claim rejection. Therefore, the core principle tested is the interpretation of ‘as soon as reasonably possible’ and the impact of prejudice on the insurer’s ability to repudiate a claim, considering the contractual intent of the notification clause.

A commercial motor policy, particularly one covering vehicles used for specialized tasks like excavation, often contains specific exclusions. The ‘tool of trade’ clause is a common exclusion that removes coverage when the vehicle is being used for its specialized function that goes beyond standard transportation. This is because such usage often involves higher risks and different types of potential damage that are typically covered under different insurance policies, such as engineering or liability insurance. The other options are less relevant: a ‘business use clause’ generally pertains to the purpose for which the vehicle is used (e.g., delivery vs. personal use), a ‘working operations clause’ is too general, and a ‘professional liability clause’ relates to errors or omissions in providing professional services, not the physical use of a vehicle.

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 and unexpected mechanical breakdown of the refrigeration unit during transit, assuming no exclusion applies.

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 policyholder’s situation, such as a pre-existing back condition in personal accident insurance or a history of driving offenses within a family for motor insurance, they can use an exclusion clause. This clause specifically carves out coverage for that identified risk, while the rest of the policy remains in force. This is a common underwriting practice to ensure the policy accurately reflects the assessed risk and premium. Option B is incorrect because a general exclusion applies to all policyholders, not a specific risk within one policy. Option C is incorrect as a market exclusion is a standard exclusion applied across the industry for fundamental risks. Option D is incorrect because while fraud can invalidate a policy, it’s a legal principle rather than a specific underwriting tool to manage identified risks prior to policy inception.

The question tests the understanding of the insured’s duty to minimize loss after a claim event, as stipulated by common law and often reinforced in policy conditions. The scenario describes a fire damaging a commercial property. The insured’s immediate action of attempting to salvage undamaged goods and protect them from further damage (like water damage from firefighting efforts) directly aligns with the duty to mitigate further losses. Admitting liability to a third party, failing to provide proof of loss, or disposing of damaged property without consent are all actions that could potentially increase the insurer’s liability or prejudice their rights, thus violating the insured’s duties.

The ‘step-back system’ for No Claim Discount (NCD) in private car insurance, as outlined in the IIQE syllabus, dictates how a claim affects the accumulated discount. For a private car with an entitlement of four or more claim-free years (resulting in a 50% or 60% NCD), a single claim in the policy year will reduce the NCD on renewal to 20% or 30% respectively. This means the discount is not entirely lost but is significantly reduced, requiring several claim-free years to rebuild to the previous level. Options B, C, and D describe scenarios that are either incorrect (complete loss of NCD for any claim, or a fixed reduction regardless of prior entitlement) or not the primary consequence of a single claim on a high NCD entitlement.

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 ‘accident,’ which implies 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 removing the event from the realm of an accident as defined for insurance purposes. The insurer’s rejection was based on the injury not being accidental, which aligns with the panel’s finding that the insured’s foreseeability of harm negated the accidental nature of the event.

This question tests the understanding of how travel insurance premiums are determined. While geographical area, duration, and the number of people insured are primary factors, the concept of an ‘annual policy’ is a specific pricing structure designed for frequent travelers. This structure offers a single premium for a defined period, typically a year, covering multiple trips. The other options represent individual trip factors or general policy features, not the specific pricing model for frequent travelers.

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 due to an accident arising out of and in the course of employment, regardless of whether the employer was at fault. The ordinance mandates insurance to cover these liabilities. Therefore, the core principle of this compulsory insurance is to provide compensation based on the occurrence of a work-related accident, not on proving employer negligence.

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 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 significantly increase the probability or severity of a claim, thus representing a poor moral hazard from the insurer’s perspective. The question tests the understanding that moral hazard extends beyond direct dishonesty to encompass a broader range of detrimental human behaviours.

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 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 significantly increase the probability or severity of a claim, thereby representing a poor moral hazard from the insurer’s perspective. The question asks for a behaviour that represents poor moral hazard, and while all options could potentially contribute, unreasonableness, as described in the provided text, directly impacts risk management through inflexible or opinionated stances that can lead to adverse outcomes.

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 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 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 (b) is a core coverage, and while contractual liability can be excluded, the scenario in (c) describes a direct consequence of a product defect, not merely a contractual breach. Option (d) describes a situation where the product itself is damaged, which is usually covered, unlike the damage to the car in the example provided in the syllabus which is covered, but not the replacement of the CD player itself.

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, as outlined in the syllabus, stipulates that if the sum insured represents a lower percentage of the total value at risk, the claim payment will be proportionally reduced. In this case, the sum insured ($500,000) is 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. The other options represent incorrect calculations or misinterpretations of the average clause, such as paying the full loss, applying a fixed deduction, or a calculation based on the difference between sum insured and value.

This question tests the understanding of exclusions in a Professional Indemnity (PI) policy. PI policies are designed to cover financial losses arising from negligent acts or omissions in professional services. However, they typically exclude liability stemming from dishonest or fraudulent conduct by the insured professional. This exclusion is crucial because insurance is meant to cover accidental losses, not intentional wrongdoing. While other options might seem plausible, the core principle of PI insurance is to protect against errors in professional judgment or execution, not deliberate misconduct.

Directors’ and Officers’ (D&O) liability insurance is designed to protect company directors and officers from claims arising from their management decisions and actions. While it covers a broad range of potential liabilities, certain types of claims are typically excluded to maintain the policy’s focus and manage risk. Specifically, claims arising from the insured’s dishonesty or fraud are excluded, as these are considered intentional misconduct rather than errors in judgment or oversight. However, the policy often includes a provision to cover the legal defense costs incurred when defending against allegations of dishonesty or fraud, even if the ultimate finding is that such misconduct occurred. This allows directors and officers to mount a proper defense without being immediately burdened by legal expenses.

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 specific manner.

This question tests the understanding of how travel insurance premiums are determined. While geographical area, duration, and the number of people insured are primary factors, the concept of an ‘annual policy’ is a specific pricing structure designed for frequent travelers. This structure offers a single premium for a defined period, typically a year, covering multiple trips. The other options represent individual trip factors or general policy features, not the specific pricing model for frequent travelers.

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 for the insured. Option C is incorrect as the insurer’s marketing strategy is an internal business decision and not a basis for policy cancellation due to a change in the insured’s risk. Option D is incorrect because while insurers assess risk, the mere fact that a risk is insurable doesn’t preclude cancellation if the risk profile deteriorates significantly after inception.

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 third-party cover, except where statutory requirements for compulsory insurance mandate otherwise. The other options represent different types of exclusions or coverages not directly related to this specific ‘tool of trade’ exclusion.

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. 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.

An insurance broker acts as an agent for the proposer, meaning their actions and disclosures are legally attributed to the proposer. The principle of utmost good faith requires full and honest disclosure of all material facts. If a broker, in their capacity as the proposer’s agent, withholds or misrepresents such facts, it constitutes a breach of this duty, which is then imputed to the proposer. This breach can render the insurance contract voidable from its inception, as the insurer relied on incomplete or inaccurate information to assess the risk and set terms. Therefore, the broker’s failure to disclose material information directly impacts the validity of the contract due to the breach of utmost good faith attributed to the proposer.

A General Average Act involves a voluntary and reasonable sacrifice or expenditure made during a peril to preserve the common adventure. Throwing cargo overboard to lighten a ship during a storm is a classic example of a General Average Sacrifice. The owner of the sacrificed cargo is then entitled to a contribution from the other parties whose property was saved. This contribution is known as a General Average Contribution. The question tests the understanding of what constitutes a General Average Act and the subsequent entitlement of the party making the sacrifice.

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 is not a ‘salvage’ in the maritime sense of saving property from peril for a reward, 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 property, not sacrifices made for the common adventure. Option D is incorrect because while a total loss might occur, the act described is a specific type of loss within the GA framework, not the definition of GA itself.