Paper 2 General Insurance Quiz 76

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 needs to demonstrate the cause was a specific event mentioned in their policy, which aligns with the definition of ‘Specified Perils’ cover.

This question tests the understanding of how an excess works in motor insurance. An excess is the amount the policyholder agrees to pay towards a claim. In this scenario, the damage is HK$12,000 and the voluntary excess is HK$2,000. Therefore, the insurer will pay the remaining HK$10,000. The question specifically asks what the insurer will pay, not the total loss or the amount the insured pays. The “Avoidance of Certain Terms and Right of Recovery” clause is a separate provision related to breaches of policy conditions and does not affect the calculation of the insurer’s payout based on the excess.

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 onus is on the insurer to demonstrate an exclusion, not on the insured to prove coverage.

This 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 a prudent underwriter’s decision to accept the risk or the terms offered. Storing highly flammable materials like chemicals in a general store, where such items are not typically expected, significantly increases the fire risk beyond what a prudent underwriter would anticipate for a standard general store. This directly aligns with the definition of a material fact that renders a risk greater than would otherwise be supposed. Options B, C, and D describe situations that are either common knowledge (typhoons in Hong Kong), are improvements to the risk (sprinkler systems), or are facts the insurer is expected to know (normal occupational dangers), and therefore do not need to be disclosed as they are considered non-material or are exceptions to disclosure requirements.

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 is distinct from personal accident insurance, which provides benefits for injuries sustained by an individual, or public liability insurance, which covers legal responsibility to third parties for damages. While a policy is a document evidencing an insurance contract, a bond is a separate financial instrument with a different purpose.

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 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 how premiums for travel insurance are determined, specifically focusing on the factors that influence the cost. The provided text indicates that geographical area, duration of the trip, and the number of persons covered are key determinants. While annual policies are mentioned as a feature for frequent travelers, they are a specific product offering rather than a fundamental premium calculation factor for a single trip. The ‘all risks’ basis is a type of cover, not a premium determinant. Therefore, the combination of geographical scope, trip length, and the number of individuals insured are the primary drivers of the premium.

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 is the employer’s legal duty to compensate, irrespective of negligence.

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 coverage 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 operational use of a vehicle.

This question tests the understanding of the legal implications of policy renewals in Hong Kong. Statement (i) is true because the duty of utmost good faith is a continuous obligation that applies at all stages of the insurance contract, including renewal. Statement (ii) is also true as a renewal is generally considered the creation of a new contract, not merely a continuation of the old one, with new terms and conditions potentially applying. Statement (iv) is correct because insurers have a duty to inform the policyholder if they do not intend to renew the policy, allowing the insured to seek alternative coverage. Statement (iii) is false because while terms can be negotiated, they are not ‘freely’ negotiable in the sense that the insurer can unilaterally change them without notice or agreement; the renewal offer typically presents specific terms, and the insured accepts or negotiates within those parameters. Therefore, statements (i), (ii), and (iv) are the accurate assertions regarding general insurance policy renewals.

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 provided an undertaking to the Hong Kong Federation of Insurers that they will only refuse a claim due to a breach of warranty if there is a causal connection between the breach and the loss, or if the breach is fraudulent. This means that a breach without a causal link or fraud would not typically lead to a claim refusal under this undertaking, even though technically the warranty is breached.

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 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. Options B, C, and D describe scenarios that are either incorrect (complete loss of NCD for any claim, or no impact from a third-party fault claim) or misrepresent the specific reduction levels for higher NCD entitlements.

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 loss, can automatically discharge the insurer’s liability from the date of the breach. However, insurers in Hong Kong have provided an undertaking to the Hong Kong Federation of Insurers that they will only refuse a claim due to a breach of warranty if there is a causal connection between the breach and the loss, or if the breach is fraudulent. This means that a breach that does not cause or relate to the loss, and is not fraudulent, will not be used to deny a claim under this undertaking. Therefore, the insurer’s ability to refuse a claim based on a warranty breach is conditional on the breach’s relevance to the loss or its fraudulent nature.

The “step-back system” for No Claim Discount (NCD) in private car insurance, as described in the IIQE syllabus, dictates how a claim affects future discounts. 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 their NCD to 20% or 30% respectively upon renewal. This means they do not lose their entire accumulated discount but are moved back to a lower tier. The question tests the understanding of this specific mechanism for private cars, differentiating it from other vehicle types or a complete loss of discount.

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, provided they follow the correct notification procedures. 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 risk. Option C is incorrect as a policyholder’s financial difficulties, while potentially a moral hazard, are not the direct trigger for cancellation based on a worsening of the insured risk itself. Option D is incorrect because while an insurer might review premiums, the fundamental right to cancel arises from the altered risk, not solely from a premium adjustment.

The Insurance Claims Complaints Bureau (ICCB) is designed to handle disputes related to personal insurance claims. It has a jurisdictional limit of HK$800,000 for the value of the claim. Complaints exceeding this amount, or those arising from commercial, industrial, or third-party insurance, fall outside the ICCB’s purview and must be resolved through other means such as litigation or arbitration. Therefore, a dispute involving a commercial property insurance claim, regardless of its monetary value, would not be handled by the ICCB.

A General Average Act is defined as any extraordinary sacrifice or expenditure voluntarily and reasonably made or incurred in time of peril for the purpose of preserving the property imperilled in the common adventure. In this scenario, the decision to jettison a portion of the cargo to lighten the vessel and prevent it from sinking during a storm is a classic example of an extraordinary sacrifice made voluntarily and reasonably in a time of peril to save the entire marine adventure. Therefore, this action constitutes a General Average Act, and the loss incurred by the owner of the jettisoned cargo is a General Average Loss.

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 is crucial for independently investigating the cause and extent of a reported loss. While the surveyor’s fee is generally recoverable from the insurer if the claim is valid, the initial appointment and payment rest with the assured. Loss adjusters, on the other hand, are usually appointed and paid by the insurer, acting as independent experts for claims investigation and negotiation, particularly for property and liability losses.

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 coverage for known risks they have not disclosed. 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 or fraud can be excluded, the primary exclusion applicable here is the knowledge of the circumstance before the policy began.

This 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 a prudent underwriter’s decision to accept the risk or the terms offered. Storing highly flammable materials like chemicals in a general store, where such items are not typically expected, significantly increases the fire risk beyond what a prudent underwriter would anticipate for a standard general store. This directly aligns with the definition of a material fact that renders a risk greater than would otherwise be supposed. Options B, C, and D describe situations that are either common knowledge (typhoons in Hong Kong), are improvements to the risk (sprinkler systems), or are facts the insurer is expected to know (normal occupational dangers), and therefore do not need to be disclosed as they are considered non-material or are exceptions to disclosure requirements.

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 failed to disclose it. D&O policies typically exclude coverage for claims arising from circumstances known or that ought to have been known at the policy inception. This is to prevent individuals from obtaining insurance coverage for known risks they have already chosen not to address. 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 defending claims, but this is contingent on the claim itself being covered, which it is not due to the known circumstance exclusion. Option D is incorrect because while dishonesty can be an exclusion, the primary reason for denial in this scenario is the prior knowledge of the circumstance, which is a distinct exclusion.

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 like Directors’ and Officers’ Liability or Professional Liability, based on the client’s unique needs. The key is that it bundles multiple liability types, not just property or general financial risks, under one policy framework.

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 invalidates a specific claim. The scenario describes a policy requiring the insured to report any change in profession. Failure to do so would mean that while the policy itself remains valid, any claim arising from a situation where the new profession increased the risk would be denied. This aligns with the definition of a condition precedent to liability, as it affects the insurer’s obligation to pay for a particular claim, not the existence of the contract itself. A condition precedent to the contract would prevent the contract from coming into effect at all. A condition subsequent to the contract would typically be an event that, if it occurs, terminates the contract. Representations, while important, are statements of fact that need to be substantially true if material, and their breach has different consequences than a condition precedent to liability.

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 mechanical failure of the refrigeration unit during transit, as this is not typically an excluded peril. Clause (B) would likely cover this if it were caused by a specific peril listed within its terms, and Clause (C) would only cover it if it fell under a very narrow set of specified perils, which mechanical breakdown usually is not. The question tests the understanding of the hierarchical coverage levels of the Institute Cargo Clauses.

Moral hazard refers to the increased likelihood of a loss occurring because an individual is insured. This can manifest in various ways, including dishonesty (fraud), carelessness leading to accidents, unreasonableness in decision-making that exacerbates problems, and negative social behaviour like vandalism. While dishonesty is a direct form of moral hazard, carelessness, unreasonableness, and detrimental social behaviour also contribute to an increased risk profile for the insurer, stemming from the insured’s attitude and conduct. Therefore, all these behaviours represent forms of moral hazard.

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 manage the significantly higher risks associated with such activities, which are typically covered under different types of insurance, such as engineering or contractor’s plant insurance. The other options are less relevant: a ‘business use clause’ generally relates to the purpose for which the vehicle is used (e.g., delivery vs. personal use), a ‘tool of trade clause’ might relate to equipment attached to the vehicle but not its primary operational function, and a ‘professional liability clause’ pertains to errors or omissions in professional services, not the operation of machinery.

This question tests the understanding of the ‘System of Check’ in fidelity guarantee insurance. This system is a crucial internal control mechanism implemented by employers to manage and monitor their employees who are entrusted with financial responsibilities or valuable assets. It involves establishing procedures and safeguards to prevent or detect fraudulent activities. Option (a) accurately describes this by focusing on the employer’s internal discipline and control over guaranteed staff. Option (b) is incorrect because while underwriting is involved, the ‘System of Check’ is a specific operational control, not the entire underwriting process. Option (c) is incorrect as ‘Target Risks’ refers to large, hazardous risks in general insurance, unrelated to fidelity guarantee internal controls. Option (d) is incorrect because ‘Transparency’ is a broader regulatory and public awareness concept, not a specific internal control mechanism for fidelity insurance.

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 statutes, reinforcing their importance in demonstrating accountability and setting performance benchmarks. The question requires the candidate to identify the most encompassing and foundational promise typically made in such declarations, which is the overarching commitment to quality and service.

Average adjusters are specialists in marine insurance, particularly in the complex area of General Average (GA) claims. Their expertise is crucial because GA claims involve intricate calculations, international maritime law, potentially hundreds of interested parties (like cargo owners), and can take years to resolve. 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. Arbitration clauses, while a method of dispute resolution, are distinct from the specialized role of an average adjuster in calculating and apportioning claims.