Paper 2 General Insurance Quiz 78

Moral hazard refers to the increased likelihood of a loss occurring because the insured party has protection against that loss. This protection can alter the insured’s behaviour, leading to greater risk-taking or less careful conduct. Option (a) accurately describes this behavioural change driven by the presence of insurance. Option (b) describes adverse selection, which occurs before the policy is issued based on pre-existing risk characteristics. Option (c) describes the principle of indemnity, which aims to restore the insured to their pre-loss financial position, not the cause of increased risk. Option (d) refers to the duty of disclosure, which is an obligation of the insured, not a manifestation of moral hazard.

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 inherent defects or gradual deterioration, which are typically excluded. Option (d) is incorrect because while the insurer must prove exclusions, the insured still has a duty to mitigate losses and not act fraudulently.

The scenario describes an individual injured while ice-skating. The insurer declined the claim based on an exclusion for ‘winter-sports’. The Complaints Panel, in interpreting this exclusion, reasoned that ‘winter-sports’ generally encompass sports played on snow or ice, regardless of the season or whether they are indoors or outdoors. Therefore, ice-skating, even indoors, falls under this category. The key principle here is the interpretation of policy exclusions, particularly when definitions are not explicitly provided. The panel’s view that ice-skating is a winter sport, even when performed indoors, highlights the broad interpretation insurers may apply to such clauses to manage risk, aligning with the principle that the exclusion is not limited to sports played in winter or outdoors.

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 the product, such as a cabinet failing to support a weight exceeding its specified limit, is typically not covered. This aligns with the principle that Product Liability insurance covers defects in manufacturing or assembly, not fundamental design flaws. Option (b) is incorrect because while liability for property damage is generally covered, the specific exclusion relates to the design itself. Option (c) is incorrect as liability for advice or instructions is a separate exclusion, not directly related to the design failure scenario. Option (d) is incorrect because while repair or replacement of goods can be excluded, the primary exclusion in this scenario is the design flaw.

The Code of Conduct for Insurers, established by the Hong Kong Federation of Insurers (HKFI), specifically addresses the standards expected in the insurance industry. It covers a broad range of practices, including underwriting, claims handling, product knowledge, and customer rights. While the Insurance Companies Ordinance (ICO) sets out regulatory requirements for insurers’ financial stability and governance, 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 expected ethical and professional standards for insurers themselves in their dealings with policyholders, particularly concerning personal insurance.

Average adjusters are specialists in marine insurance, particularly in 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. This specialized knowledge is why they are also engaged for complicated hull and cargo losses, distinguishing them from general loss adjusters who might handle claims in other insurance classes where insurers’ own staff or less specialized adjusters are more common.

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 and well-being throughout their relationship with the insurer. While an insurer’s public image as a corporate citizen is important, it is not a primary focus of the Code of Conduct itself, which is more directly concerned with the specifics of insurance practice and customer protection.

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, differentiating it from a complete loss of NCD or a fixed penalty.

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 to prevent duplication of coverage and ensure that each policy covers distinct risks. Therefore, a fire that occurs during a boiler explosion would typically be covered by a separate fire insurance policy, not the boiler explosion policy.

The question tests the understanding of the definition of ‘theft’ within the context of a theft insurance policy, specifically focusing on the requirement of forcible and violent entry or exit. Option A correctly states that the policy typically requires evidence of forced entry or exit to cover a theft claim. Option B is incorrect because while damage to premises is often covered, it’s a consequence of the forcible entry, not the definition of theft itself. Option C is incorrect as theft by employees is generally excluded and falls under fidelity guarantee insurance. Option D is incorrect because while fire damage caused by thieves is a potential issue, it’s typically excluded from a theft policy, not a defining characteristic of theft.

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 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, especially for non-marine claims.

This question tests the understanding of how changes in the insured risk can impact an insurance policy. The Insurance 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 an increase in premium might be a consequence, it’s not the primary action an insurer takes when the risk deteriorates. Option C is incorrect as the insurer’s obligation is to assess the risk as it is, not to provide advice on risk mitigation unless stipulated. Option D is incorrect because while the insurer might review the policy, cancellation is a potential outcome of a significant negative change in risk, not merely a review.

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 modify the policy. This modification typically takes the form of an exclusion clause or endorsement, which carves out coverage for that specific risk. This allows the insurer to offer coverage for the standard risks while mitigating potential losses from the identified higher-risk element. Options B, C, and D describe different, less precise or incorrect methods of risk management. A general exclusion (B) is too broad and doesn’t target the specific risk. A market exclusion (C) refers to risks excluded by most insurers in the market, not a specific underwriting decision for an individual policy. A policy cancellation (D) is a more drastic measure and not the primary method for addressing a specific, manageable risk within an otherwise acceptable profile.

This question tests the understanding of the legal implications of policy renewals in Hong Kong. Statement (i) is correct because the duty of utmost good faith, which is fundamental to insurance contracts, is a continuing obligation and is particularly important at renewal when new information may be relevant. Statement (ii) is also correct; a renewal is generally considered the creation of a new contract, not merely a continuation of the old one, meaning new terms and conditions can apply. Statement (iv) is true as insurers have a duty to inform policyholders if they do not intend to renew, allowing the insured to seek alternative coverage. Statement (iii) is incorrect because while terms can be negotiated, they are not entirely ‘freely’ negotiable in the sense that insurers must adhere to regulatory requirements and their own underwriting guidelines; the renewal offer is typically based on the insurer’s assessment and standard terms, not an open negotiation for every clause.

The scenario describes a situation where an insurer provides a replacement item for a non-depreciating subject matter that has been damaged. This aligns with the definition of ‘Replacement’ as a method of indemnity where the insured receives a new item to substitute the damaged one, particularly when the original item’s value doesn’t decrease over time. ‘Reinstatement’ involves restoring the damaged property to its pre-loss condition, which is not applicable here as a new item is provided. ‘Salvage’ refers to the residual value of damaged property, and ‘Repatriation Expenses’ cover the cost of returning a deceased person’s remains. Therefore, ‘Replacement’ is the most accurate term for the indemnity provided.

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 whose breach does not void the entire contract but rather invalidates a specific claim. The scenario describes a policy requiring the insured to report a change in profession. Failure to do so, as stipulated, would mean the insurer is not liable for any claims arising from that changed profession, even if the policy itself remains in force. 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 commencing in the first place, while a condition subsequent would typically void the contract or alter its terms after a specific event. A warranty, while a strict obligation, is a different classification of 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 provided text states that Personal Accident (PA) policies in Hong Kong are typically ‘Accidents Only’ policies. This means they are designed to cover benefits arising from accidental events, such as injury or death due to an accident. Sickness benefits, particularly for temporary disablement, might be included, but death from sickness is explicitly excluded as it falls under life insurance. Therefore, a policy that covers death from sickness would not be classified as a standard PA policy in the Hong Kong context described.

This question tests the understanding of how changes in the insured risk can impact the policy. The Insurance Companies Ordinance (Cap. 41) and related common law 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 the policy terms allow for it. This is because the original assessment of the risk, which formed the basis of the premium and terms, is no longer valid. Option B is incorrect because while a change in market competition might influence underwriting decisions, it doesn’t directly relate to a change in the insured’s risk circumstances. Option C is incorrect as the insurer’s marketing philosophy is an internal business consideration, not a direct response to a change in the insured’s risk. Option D is incorrect because while expert advice is sought during risk assessment, it doesn’t represent a change in the insured’s risk itself, but rather a tool for evaluation.

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 clients might request to be integrated into such a combined policy, reflecting a broader risk management approach. The other options are less likely to be standard inclusions in a combined liability policy; property insurance covers physical assets, pecuniary insurance covers financial interests, and a ‘combined umbrella’ policy is a broader, often bespoke, type of cover that can encompass various risks, not exclusively liability.

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.

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.

The scenario describes a situation where an insurer has consistently accepted late premium payments without objection. This pattern of behavior, if it leads the insured to reasonably believe that punctuality is no longer a strict requirement, can lead to the insurer being prevented from enforcing strict punctuality in the future. This legal principle is known as waiver, where the insurer, through its conduct, relinquishes its right to enforce a contractual term. For estoppel to apply, the insured must demonstrate that they relied on this conduct to their detriment. Therefore, the insurer’s past acceptance of late payments without protest suggests a potential waiver of the strict premium payment deadline.

The scenario describes a situation where an insured individual suffered a back injury and received medical treatment. The insurer initially paid Temporary Total Disability (TTD) benefits. However, based on a medical examiner’s report indicating improved trunk movement, the insurer reclassified the benefits to Temporary Partial Disability (TPD) from a specific date. The core issue is the conflicting medical opinions regarding the insured’s ability to perform any work versus performing some duties. The Complaints Panel, in this case, gave more weight to the attending doctors’ opinions, who stated the insured was unable to perform any work until a later date. This aligns with the principle that TTD benefits are payable when an insured is unable to perform *any* of their usual occupation’s duties, while TPD applies when they can perform *some* but not all duties. The panel’s decision to continue TTD benefits until the date specified by the attending doctors, despite the insurer’s assessment of partial recovery, highlights the importance of the insured’s attending physician’s opinion in determining the extent of disability, especially when there’s a dispute.

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 the insurer’s financial solvency. Its primary function is to satisfy legal requirements for proof of insurance.

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 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 it is properly marked, it would be covered under the policy’s specified perils. Therefore, a ship’s boat that is permanently marked with the parent vessel’s name would be covered for perils of the seas.

The scenario describes a situation where an insurer provides a replacement item for a non-depreciating subject matter that has been damaged. This aligns with the definition of ‘Replacement’ as a method of indemnity where the insured receives a new item to substitute the damaged one, particularly when the original item’s value doesn’t decrease over time. ‘Reinstatement’ involves restoring the damaged property to its pre-loss condition, which is not applicable here as a new item is provided. ‘Salvage’ refers to the residual value of damaged property, and ‘Repatriation Expenses’ are costs associated with returning a deceased insured’s remains. Therefore, ‘Replacement’ is the most accurate term for the indemnity provided.

In the context of insurance contracts, a ‘representation’ is a statement of fact made by the proposer before the contract is concluded. The principle of utmost good faith (uberrimae fidei) requires that such representations, particularly those concerning material facts, must be substantially true. If a representation is found to be untrue, and it relates to a material fact that influences the insurer’s decision to accept the risk or the terms offered, the insurer may have grounds to void the contract. The requirement is for substantial truth, meaning minor inaccuracies that do not affect the risk assessment are generally acceptable, but significant falsehoods can invalidate the policy. Options (b), (c), and (d) present absolute or overly strict requirements that are not aligned with the legal standard for representations in insurance.

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 *scope* of voluntary cover beyond the statutory minimums. Food poisoning claims and damage to stock-in-trade are also specific exclusions for certain commercial uses. Damage to roads due to vibration is a separate exclusion related to the vehicle’s weight and operation.