|
| |
| |
|
In
Hong Kong,
the majority of commercial buildings and their contents are
likely to be insured under a traditional fire insurance policy, with
special (extra) perils almost certainly added.
(a) Basic intentions and scope of cover This is virtually
self-explanatory for this class of business, but specifically policies
are likely to cover:
(i) Fire loss or damage : This may seem totally obvious, but some
features need to be noted:
(1) "Fire" means actual ignition of something that should not be on
fire, not deliberately caused or arranged by the insured (i.e. not
fraudulent).
(2) "Fire" will include damage caused by smoke, water and heat, if the
proximate cause is fire as understood above. Damage reasonably caused by
the fire brigade or others fighting a fire is
also covered.
(3) The fire does not have to be on the insured's premises. Thus, a fire
as defined above in a neighbouring property could create a valid fire
claim from heat, smoke or water damage, etc. to the insured property.
(ii) Lightning : whether followed by fire or not.
(iii) Explosion : is actually an excluded peril under the basic fire
policy, but the exclusion does not apply to damage arising from the
explosion of gas being used for domestic (not
commercial) purposes.
(iv) Special perils : also known as extra perils, extraneous perils or
extended perils. These are perils (causes of loss) traditionally
available for extra premium as additions to the standard fire policy.
There are many such perils and the usual practice with insurers is to
attach a complete list of available covers to each policy, which is
appropriately annotated as to which of the extra perils apply. We shall
not name all such perils, but a customary way of classification is to
sub-divide them into perils:
(1) of nature (e.g. cyclone, earthquake, etc.);
(2) of an anti-social nature (e.g. riot, malicious damage, etc.);
(3) loosely described as of a "chemical" nature (e.g. explosion,
spontaneous combustion, etc.);
(4) of miscellaneous types (e.g. overflowing of water apparatus, impact
damage from animals or vehicles, etc.) .
Back to the top
The types of motor
cover available may be divided into three categories:
(i) Third Party : this covers the insured for his liability at law for
death,
injury or property damage to third parties.
(ii) Third Party, Fire & Theft : this includes the cover for (i) above,
plus
property insurance of the insured vehicle, but only for loss or damage
resulting from the risks of Fire or Theft.
(iii) Comprehensive : the widest form of cover available, this includes
all that
(i) 3rd (ii) above cover, with effective "all
risks" insurance on the insured
vehicle. Obviously, the premium for comprehensive cover is the highest.
Legally, all motor vehicles which will be driven on the public road
must be insured third party liability insurance. The own damage
section is optional and is not required by laws. However, should the
motor car have a valid hire purchase and lease agreement in force,
the finance company normally require you to insure comprehensive
insurance.
No Claim Discount
A significant and almost unique feature of motor insurance is the
practice of granting a progressive discount on
the renewal premium if the previous year has been claim-free. The
customary scale of discounts varies. With private cars, one claim-free
year earns a 20% No Claim Discount (NCD), the second year 30% and so on,
rising to a maximum of 60% after five claim-free years. With other
classes of vehicles, the discount is likely to be only 10% per year,
rising to a
maximum of 30% after three years. Some features to note about the no
claim discount system are:
(i) Originally, the system was known as a No Claim Bonus (NCB).
Technically, this is an incorrect title, since a bonus implies the
receipt of extra money. "No claim
discount" (NCD), i.e. a reduction on next year's premium, is more
accurate. However, old customs are difficult to remove.
Consequently, you may still hear references to an "NCB" (rather than an
NCD) entitlement.
(ii) With private cars (not other vehicles), the NCD system operates on
what is called a "step-back system". This means that a single claim will
not totally destroy a high entitlement to a discount. For four or more
years’ entitlement (50% or 60% NCD) a single claim during the year
reduces the
discount on renewal to 20% or 30% respectively. Lesser entitlements, of
course, mean that any claim will wipe out the discount at renewal.
You are recommended not to do so. Usually, the insurance company
would like to send his representative (loss adjuster usually) to
inspect the vehicle such that he can investigate whether any third
party is responsible for the damage and from whom the insurance
company can claim reimbursement. Furthermore, his representative
will agree with the repairer a fair charge for repair. You, as the
policyholder, have obligation to observe the insurance company's
those interest and right.
Usually, a motor insurance policy does not contain any condition
that restrict the insured motor car to be driven during adverse
weather such as typhoon no. 8 or black rain signal. You, as the
policyholder, however have obligation to take reasonable steps to
safeguard the insured motor car from loss or damage. Unless, you
have good reason to drive during adverse weather condition, you are
suggested not to do so. Otherwise, you are running risk of being
considered breach of policy condition.
Depend on the type of accident involved. In general, you are
suggested
To: -
i) obtain name(s) and address(es) of other driver(s) involved
ii) note their car registration number(s) and make of car(s)
iii) ask for name of their insurance company and their policy or
certificate number if available
iv) note name and address of independent witness and make a rough
diagram of the accident
v) if the other party is a fault, please lodge a complaint to the
police
vi) report the accident either in writing or by phone to insurance
company as soon as possible even if you do not intend to make claim,
complete accident report
Not to:-
i) discuss who was to blame for the accident
ii) admit responsibility
iii) attempt to settle with any other party involved
You are suggested to
i) notify the other driver in writing of your intention to claim
from him
ii) say that you hold him responsible, and ask him to notify his
insurance company
iii) write direct to his insurance company if you have details,
remember to quote his policy or certificate number if available
iv) send an estimate of damage as soon as possible
Of course, you may need legal assistance under some circumstance.
A policy excess (sometimes called a
deductible) means that up to the stated
amount is not insured. Usually applicable to property cover (insurance
of the
insured's own vehicle), an excess of HK$2,000, for example, means that
with
damage of HK$12,000 the insured can only recover under the policy the
amount
of HK$10,000, and so on.
The standard policy
excesses relate to a number of situations, including:
(A) Driving by an Unnamed driver (but one covered by
the policy);
(B) Driving by a Young driver (usually under 25 years
of age);
(C) Driving by an Inexperienced driver (usually less
than 2 years driving experience with a full licence);
(D) Loss or damage whilst the car is parked;
(E) Loss or damage arising from theft.
10.What does a Personal
Accident (PA) usually cover?
(a) Basic intentions and scope of
PA cover
PA insurance was the first major class of accident insurance, originally
developed to deal with a demand arising from the many accidents
involving the early railways. Its basic intentions have remained
constant, although the scope of cover has widened over the years.
Policy cover may be described under three main headings:
(i) Lump sum benefits : As the name suggests, these are single amounts
payable in the event of death or other specified injury arising from an
accident.
(ii) Weekly benefits : These are periodic payments related to temporary
total or partial disablement. The benefit is calculated weekly, but
payments are usually made monthly during disablement, subject to a
maximum period (often 104 weeks).
(iii) Medical expenses : The expenses must arise because of accidental
injury and are subject to a limit specified in the policy schedule.
(iv) Compensation under (i) above is usually
expressed as a percentage of a sum specified in the policy (often called
the Principal Sum Insured). Death and a number of major injuries such as
Permanent Disablement, Loss of Limb(s) and Total Loss of Sight usually
merit a 100% benefit. Lesser, but still serious and permanent, injuries
have lower percentages, ranging from (for example) 50% for the loss of
sight in one eye, to as low as 5% for example for the loss of a single
finger joint. The table of specified benefits may be quite detailed.
(V) Weekly benefits apply for temporary
disablement from the insured's usual
occupation, although other policy wordings may relate to "any
occupation" or some other description. There are usually two divisions
for this cover: Temporary Total Disablement and Temporary Partial
Disablement, obviously providing different
amounts of compensation.
Back to the top
11.What are limitations or
exclusions of Personal Accident (PA) Insurance?
Personal Accident
(PA) Limitations and
exclusions
(i) Accidental bodily injury : This is defined in the policy and
frequently includes such words as "physical injury from accidental,
external, violent and visible means". Some policies have more modern
wordings, but each is likely to insist that the injury/disablement only
arises from the accident. Customary wordings include a phrase such as
"solely and independently of any other cause result in ......".
(ii) Injury definitions : These will vary between insurers, but
typically the following will apply:
(1) Permanent means lasting at least 12 months, at which time there is
no reasonable hope of improvement.
(2) Loss of limb means physical separation at or above the wrist or
ankle. (Many insurers, however, would accept permanent loss of use of
the limb as being equal to the loss of the limb.)
(3) Loss of sight means total and irrecoverable loss of all sight in the
eye(s) concerned.
(iii) Time limits : The strict policy requirements require death or
disablement to take place within 12 months (or some other specified
period) of the injury concerned. Of course, special circumstances (e.g.
a long-lasting coma and then death) would merit sympathetic
consideration.
(iv) Benefit limitations : Policies usually provide that there is no
accumulation of benefits, except for weekly benefits entitlement
followed by the death of the insured. As stated, temporary benefits are
normally limited to 104 weeks.
(v) Specific exclusions : There are a number of these and they may be
considered under various headings:
(1) Fundamental risks which would include war, nuclear and, increasingly
these days, AIDS.
(2) Hazardous activities, such as dangerous sports (mountaineering,
winter sports, etc.) and aviation, other than as a fare-paying
passenger.
(3) Anti-social activities which includes suicide, deliberately
self-inflicted injury, alcohol and other substance abuse.
(4) Miscellaneous exclusions, for example, childbirth or pregnancy and
whilst on duty with the fire or armed services.
12. What
are the use of group PA policies？
Group policies : Increasingly,
24-hour basis PA cover may be provided as a
"fringe benefit" by employers.
This serves supplementary cover to the
inadequacy of Employees' Compensation Insurance which covers mainly on
working hours.
Whereas Medical
Insurance in PA is primarily intended to provide a benefit to the
insured in the event of death or injury from accident, medical
insurances
are intended to cover the cost of medical expenses and/or treatment
resulting either from accident or sickness.
14. What is the scope of
cover of an ordinary Medical Insurance？
Medical
insurances are intended to cover the cost of medical expenses and/or
treatment resulting either from accident or sickness.
15. Please
state the limitations of an ordinary Medical Insurance？
Policies usually represent annual
contracts, although these may be renewed and days of grace are usually
allowed for premiums other than the first one. Practice varies as to
cancellation entitlements. Most policies allow cancellation by the
insured, but not all grant the same rights to the insurer. Indeed, with
some schemes, the intention is for the contract to be renewable at the
option of the insured. Technically, however, this may
render such a policy "long-term" in nature.
Limitations and exclusions
(i) PA exclusions : As the cover includes circumstances covered by PA
policies, nearly all the usual PA exclusions apply (see above).
(ii) Special exclusions : These include:
(1) Congenital conditions;
(2) Pre-existing conditions and disabilities (as with (1) above, the
intention is clearly to exclude situations there before cover applied);
(3) Birth control/infertility treatment;
(4) Cosmetic surgery;
(5) Routine medical examinations and check-ups;
(6) Dental treatment (unless arising from an accident during policy
cover).
16. What
are the basic intentions and scope of cover of the household insurance？
The main element of cover for
household insurance is property insurance of
the buildings and/or contents belonging to the insured. Cover may be
purchased insuring:
(i) Buildings only : This would mainly interest landlords.
(ii) Contents only : This would mainly interest tenants.
(iii) Buildings and contents : This would interest owner/occupiers.
Cover may be on a specified perils or (with more modern policies) on an
"all risks" basis. Policies are detailed and complex, requiring careful
study, but an outline of the cover provided includes:
(1) Buildings belonging to the insured or for which he is responsible.
The specified perils cover starts with Fire and goes on to include most
of the Additional (Special, Extended) Perils available with fire
insurances as part of basic cover. (The list is long and includes items
such as Storm/Cyclone, Earthquake, Explosion, Animal/Vehicle Impact,
etc.) In addition, loss or damage from Theft is included.
(2) Contents belonging to the insured and members of his family
permanently residing with him. Also include (if not otherwise insured)
property of resident household servants. With specified perils cover,
the list is similar to that for Buildings.
Note: If the cover for (1) or (2) above is on an "all risks" basis, all
loss or damage to specified property is covered, unless the cause is
specifically excluded.
(3) Contents temporarily removed but contained in premises within the
specified geographical area.
(4) Contents in transit to a new home.
(5) Other "property" cover including such miscellaneous items as
replacing locks if keys are lost or stolen, and replacing frozen food
which spoils owing to breakdown of refrigerators, etc.
(6) Architects and Surveyors Fees in respect of reinstatement of damaged
buildings.
(7) Accommodation/Rent if premises are uninhabitable because of an
insured peril, the policy may provide for the additional costs involved
with alternative accommodation or (in the case of a landlord) the loss
of rent. (These, of course, are pecuniary
insurances.)
(8) Public liability towards third parties as a consequence of the
insured's ownership or occupancy of the insured premises.
(9) Personal accident : a lump sum PA benefit is payable if the insured
should die in a fire or at the hands of thieves.
Back to the top
17. What
are the limitations and exclusions of the household insurance？
Limitations
and exclusions of household insurance
(i) War, riot and associated risks;
(ii) Nuclear risks;
(iii) Consequential loss (other than (a) (7) above);
(iv) Unoccupancy : Policies usually suspend cover (sometimes still
covering fire and natural perils) if the premises are unoccupied for
more than 60 days;
(v) Policy
excesses : Some perils (e.g. windstorm, etc.) are likely to be subject
to a specified excess, partly to eliminate trivial losses and partly to
involve the insured in his own loss experience;
(vi) Subject to average : Property is expected to be insured for its
full value. If under-insurance exists at the time of a loss, the insured
is not fully covered. To the extent that under-insurance exists, the
insurer is relieved of liability for a loss (always subject to the sum
insured). For example, if at the time of the loss the sum insured
represented only 80% of the value at risk, the claim payment would be
limited to 80% of the loss (limited to the sum insured).
18. What
does a Travel Insurance cover?
Basic intentions and scope of cover
The intentions are virtually self-explanatory, to meet unforeseen
financial and other problems encountered whilst on holiday.
Specifically, the cover provided is very diverse and is likely to
include:
(i) Medical expenses : Private medical treatment in some countries,
notably the United States and Canada, is very expensive. High limits of
cover for necessary medical treatment incurred whilst on holiday are
therefore given, sometimes amounting to several millions of dollars.
(ii) PA benefits : On a similar basis to PA covers already discussed.
(iii) Luggage loss/damage : On an "all risks" basis, this cover may
cover the ultimate loss with an additional sum for emergency purchases
as required.
(iv) Loss of deposits : In certain circumstances (death/illness of the
insured or close relative), all or part of money payable for a holiday
may be lost. The policy covers such losses.
(v) Loss of money : A limited amount of cover is available for money
lost or stolen whilst on holiday.
(vi) Delays : A specified sum is payable in the event of inordinate
delays of aircraft for time in excess of a stated period.
(vii) Repatriation expenses : The extra expenses involved with returning
an injured insured, or his remains in the event of death on holiday.
(viii) Public liability cover : The legal responsibility of the insured
towards third parties in respect of death, injury or property damage.
(ix) Miscellaneous coverage : A wide variety of cover and services may
be found in this competitive class of business, including a benefit for
Hijack, consultation and advice on an international "helpline", a daily
Hospitalization benefit, etc.
19. What
are the limitations of Travel Insurance?
Limitations and exclusions
(i) Generally : These will be in line with the various types of
insurance offered, e.g. PA cover will be subject to the customary PA
exclusions. Liability cover may not include liability arising from the
use of motor vehicles, etc.
(ii) Excesses : Most sections of the policy are likely to be subject to
an excess, perhaps of $100 or more, mainly to eliminate trivial claims.
(c) Premium basis
Sometimes policy cover is offered as a "package" deal, where units of
cover may be purchased. In other cases, individual covers and sums
insured may be selected. In either case, the important elements in
deciding the premium are:
(i) Geographical area : Many insurers offer three bands of cover, Hong
Kong and immediately neighbouring countries, Asia and World-Wide,
obviously with increasing rates.
(ii) Time element : Premiums are usually quoted according to the number
of days involved with the trip. Most companies quote on a band of days,
e.g. not exceeding 3 days, 7 days, 14 days, 28 days, etc.
(iii) Persons covered : Travel insurance is obviously related to family
holidays. The insured's spouse and family or friends travelling with him
may be offered advantageous overall rates.
(iv) Annual policies : For frequent travellers (business and/or holiday)
an annual contract may be arranged at an attractive single premium.
20. What
other features do Travel Insurance have？
(i) Underwriting : A feature of this
type of business is that everything is made as simple as possible,
because cover is usually obtained at the last minute and a product which
is not "user friendly" with this mass market is not likely to succeed.
As a consequence, there is little individual underwriting of individual
risks.
(ii) "Master policies" : It is quite common for "master policies" to be
issued to travel agents, who arrange many "package" holidays. Individual
customers merely receive a certificate outlining the basic provisions of
the cover.
21. What
does a Contractor All Risks (CAR) insurance policy cover
？
The usual form of policy
is in two Sections:
(i) Section I provides property insurance on an "all risks" basis in
respect of specified property, which is likely to include the contract
work, materials supplied by the Principal, construction plant and
equipment and construction machinery. Clearing of debris costs
may also be included.
(ii) Section II provides liability insurance for third party injury or
property damage arising out of the construction work.
Back to the top
22. What
does a Contractor All Risks (CAR) insurance policy exclude？
(i) Section I has the usual "all
risks" exclusions. Other specific exclusions include faulty design and
losses only discovered on taking an inventory.
(ii) Section II excludes making good any work covered under Section I of
the policy and various other perils, including weakening of support of
other buildings (which cover can be added to the policy for extra
premium).
(iii) Deductibles are normal with such policies, varying in amount
according to the peril concerned with Section I cover. Rather unusually,
it is also the custom to have a deductible under the liability section
of the policy.
23. How would you
describe the scope of cover provided by the Employees' Compensation (EC)
policy？
That cover is provided in two major
ways:
(i) Liability under the EC Ordinance : This is the statutory liability
which is placed upon an employer, without proof of negligence, to pay
compensation in stipulated amounts to employees or their dependants in
respect of injury or death arising out of and in the
course of their employment.
(ii) Liability under "Common Law" : This relates mostly to liability in
tort (mainly negligence), where it can be established that there is
fault on the part of the employer in respect of death of or injury to
employees, again arising out of and in the course of their
employment. Compensation to employees or their dependants is likely to
be significantly more than with EC benefits, but (unlike EC liability)
the liability of the employer must be proved and it is contestable by
the employer or his insurer.
24. What
are the major limitation and exclusions of the Employees' Compensation (EC)
Insurance？
As EC is a compulsory class of
business, there are not many exclusions and those may be overruled by
statutory provisions (see below). Typically, however, the policy will
exclude:
(i) liability under agreement (contractual liability);
(ii) liability to employees of contractors to the insured;
(iii) persons who are not employees within the meaning of the EC
Ordinance;
(iv) "standard" exclusions, such as war and nuclear risks.
25.How
are the premiums of EC rated？
This is usually a rate per cent or
per mille (according to the type of
employer concerned) applied to the annual payroll of the employer. As
such, the initial premium must be provisional, subject to adjustment
when the final figures for the year are known.
26. What
other features does an Employees' Compensation Policy have.？
(i) Avoidance of certain terms and
right of recovery : This clause is identical in intent to that in motor
policies. It gives a right of recovery from the insured if compulsory
insurance legislation compels an insurer to pay a claim when a breach of
policy
provisions would otherwise allow the insurer to avoid liability.
With EC claims, this right may be of more value, since the insured is
perhaps more likely to be able to reimburse the insurer.
(ii) Premium adjustments : Most employers understate their payroll when
the provisional premium is being calculated, so following up adjustments
is quite important.
PL27.What
are the basic intentions and scope of a Public Liability (PL) / 3rd Party
Liability policy？
This covers the insured's legal liability
(sometimes expressed as "liability at law") in respect of accidents
occurring during the policy year. Claims may arise later (sometimes
years later), but they are still covered, provided the insured satisfies
notification requirements in the policy.
Normally the policy will cover both injury and property damage claims.
It also covers legal expenses, both of the insured in defending or
resisting such claims and those of the successful third party. The
policy is usually subject to a limit of liability cover, which applies
for any one claim (and sometimes for any one year). Legal costs are
usually not subject to a separate policy limit, but are payable in
addition to compensation limits.
28. What
are the limitations and exclusions of PL？
Limitations and exclusions
(i) Geographical : Accidents occurring outside a specific geographical
area are not covered. Also, claims are restricted to those subject to
the legal jurisdiction of Hong Kong.
(ii) Other policies : Other policies may insure liability risks. To
avoid overlap and confusion, such claims (e.g. motor, EC, products
liability, professional advice, etc.) are excluded.
(iii) Contractual liability (or liability assumed under an agreement) is
excluded.
(iv) "Standard" exclusions of war and nuclear risks.
29. What
are the other features of PL?
i) "Long-tail" business : All
liability insurance, is long-tail in nature, i.e. claims may arise and
develop over a long period of time, so it is necessary to keep files and
reserves open for much longer than with "short-tail" business, such as
property insurances generally.
(ii) "Claims-made" cover : Such policies limit cover to claims actually
made upon the insured during the currency of the policy, or a specified
limited period thereafter (see also comments in 1.6.3 and 1.6.4 below).
Whilst not unknown, this form of cover is not
common with PL insurances, which are usually on a "claims-occurring"
basis.
30.What are the basic
intentions and scoe of cover of the Cargo Insurance?
(a) Basic intentions and scope of
cover
Cargo being goods carried for reward on a vessel, the insurance of them
is clearly a property insurance, usually in the form of a set of
Institute Cargo Clauses (ICC). Such cargo clauses are:
(i) ICC (A) : The cover under (A) Clauses is on an "All Risks" basis and
is sometimes the only form acceptable to banks who are advancing money
or giving guarantees in respect of cargo shipments.
(ii) ICC (B) : (B) Clauses are on a specified risks basis (see (e)
below).
(iii) ICC (C) : (C) Clauses also cover specified risks, but fewer risks
are specified.
Major comments concern ICC(A) cover, which is the most common form
issued.
31.Can you explain very
briefly (A), (B) and(C) Clauses' cover, their exclusions and features?
Cover under (A) Clauses is "all risks", as mentioned. Thus, any form of
loss or damage is covered unless specifically excluded. Cover is
sometimes described as being on a "Warehouse to Warehouse" basis, so
that the cargo is covered from the time it leaves the sender's premises
until it reaches final storage destination. This very frequently will
involve land and sea transit.
General average and salvage charges are insured, as well as loss of or
damage to the specified cargo.
(b) Limitations and exclusions
Being cover on an "all risks" basis, there are a number of exclusions.
Without specifying the full list, the following examples should be noted
:
(i) Wilful misconduct of the assured.
(ii) Expected losses, such as wear and tear, and ordinary leakage
losses, etc.
(iii) Inadequate packing, bearing in mind the journey and nature of the
cargo.
(iv) Inherent vice, that is, damage arising from the cargo itself (e.g.
meat or fish which goes bad, wine which turns sour, etc.).
(v) Unseaworthiness of the vessel, of which the assured is aware.
(vi) War, strikes, etc., which are, nevertheless, insurable for extra
premium.
One
feature with cargo
insurance is the Valued policies : The indemnity provided is "in
manner and to the extent agreed", so total losses involve the payment of
the sum
insured (indeed partial losses, "particular average", is also paid
proportional to the sum insured). Although wear and tear is excluded as
a cause of loss, valid claims are not subject to any deduction under
this heading.
This shall be
involved the concept of
Insurable Interest.
In simple terms, insurable interest is that relationship with the
subject matter (a person, in the case of life insurance) which is
recognized at law and gives rise to a legal right to insure that person.
This is a common law concept that has applied for centuries and is
obviously based on common sense. If you have no relationship with a
given person, why should you have the right to insure him and thus
profit from his death? Some particular points to be noted with this
principle are:
(a) Statutory reinforcement : the common law requirement for insurable
interest has in Hong Kong been reinforced by an Ordinance, the Insurance
Companies Ordinance (ICO). Section 64B of the ICO renders any policy
effected without insurable interest in the life insured void.
(b) Insurable interest in oneself : we all have an insurable interest in
our own lives. From the old common law concept that husband and wife are
one person, it follows that there is also an insurable interest in one's
spouse. That insurable interest has always been recognized to be
unlimited in amount (which means you have the right to insure yourself
or your spouse for any sum).
(c) Insurable interest in others : to have an insurable interest in
other people, common law requires some financial involvement which could
be at risk by the other person dying. Some examples which may be
reasonably common are:
(i) debtors : if a person owes you money, you may insure him for the
amount of the loan, plus reasonable interest;
(ii) business partners : especially where personal services are
involved, such as performers, musicians etc.;
(iii) contract relationships : if another person's services have been
engaged under contract (booking a singer for a concert, professional
sportsperson etc.), that person's death may cause the other contract
party to suffer financially. That potential loss is
insurable.
Note: This heading would include a common life insurance product known
as Key Person Insurance, where an employer insures an important
employee, in case of loss to the company from the employee's death.
(d) Blood relationships and family members : in some countries, e.g.
U.S. and Australia, a family relationship (brother, sister, parent,
child etc) is sufficient to constitute insurable interest. This is not
true in Hong Kong, where common law follows that of the U.K., in which
blood relationship in itself is not regarded in law as constituting an
insurable interest. Any policy which may have been issued in Hong Kong
on children or other family members’ lives, would therefore have been
technically void (see (a) above). This caused some concern, since Hong
Kong substantially follows U.S. practice with life insurance.
Consequently, a statutory modification was made, granting an extension
considered in (e) below.
(e) Statutory extension of insurable interest in Hong Kong : by virtue
of Section 64A of the ICO, a parent or guardian of a minor (person aged
under 18) is given an insurable interest in that young person. This is
an important exception to the general rule in (d) above. It also means
that, apart from one’s spouse, only the relationships mentioned
(parent/guardian of a minor) constitute insurable interest arising from
blood or family connection. An insurance effected on the basis of any
other blood or family relationship is technically void (see (a) above).
(f) Sections 64C and 64D of the ICO : these Sections have two other
important provisions:
(i) the person with the insurable interest in another, or for whose
benefit the contract is arranged, must be named in the contract;
(ii) the extent (amount) of the insurable interest one has in another is
the limit of the amount of insurance that may be effected.
(g) When is the interest needed? : this is a key question, and very
important consequences flow from its answer. The answer is that
insurable interest is only needed when the contract begins, and becomes
irrelevant thereafter. What could be the (quite legal) consequences of
this? Some examples are:
(i) Divorce : a spouse, who insures his/her spouse and then becomes
divorced, can keep the policy in force and be perfectly entitled to
collect the benefit in due time.
(ii) Debts : it is legally possible to insure your debtor, have the debt
repaid, keep the policy in force, and be "paid again" in due time.
(iii) Assignment : it is quite legal to transfer a properly arranged
life insurance to a third party, provided this was not intended at the
outset.
33. My
doctor has just told me that there is a big problem on my health. Will it be
wise to buy a life policy immediately and not to tell insurance company
about doctor's comment
?
This concerns an important insurance
principle, that of utmost good faith. Simply expressed, utmost good
faith requires the disclosure of all material facts, whether they are
requested by the insurer or not. A material fact is one that would
influence the judgement of a prudent underwriter in deciding whether to
insure a particular risk, or the terms on which to insure it. Some
points to note:
(a) What to disclose : clearly, the insurer wishes to know all important
facts, but you cannot be expected to disclose what you reasonably cannot
be expected to know. Some medical conditions, for example, may be easily
recognizable to qualified doctors, but the average layman cannot be
expected to self-diagnose and reveal such things.
(b) Non-medical application : if the insurance is arranged without a
physical examination of the applicant, the insurer will normally have
great difficulty in alleging that anything not covered by questions on
the application or personal physician's form is material.
(c) Medical application : if the insurance is arranged with a physical
examination of the applicant, the insurer cannot hold against the
applicant any omissions or mis-diagnosing by the medically qualified
person concerned.
(d) Medical tests : the insurer is entitled to supplement information
supplied verbally with reasonable medical examinations or tests, but
great care must be taken not to breach the Personal Data (Privacy)
Ordinance, which requires insurers to explain the need for gathering
information before any testing takes place. The person concerned also
has the right under that Ordinance to be told the result of any tests.
(e) Breach of the duty : technically, this constitutes a breach of
utmost good faith, which normally renders the contract voidable by the
insurer. If fraud is involved, this situation remains true in Hong Kong
and the insurer might well avoid the contract. But with most policies in
Hong Kong regard has to be taken of the Incontestability Clause , which
means that the policy cannot be contested after it has been in force for
a specified period (unless there is proof of fraud).
34. Under
traditional classification, what are the types of cover？
These will consist of the four basic
formats , although there are many possible
variations and combinations of the different types of cover. The major
traditional types we shall consider are as follows:
Term Insurance
Such a policy plan provides cover for a specified period or term only,
and may also be described as temporary insurance. The policy benefit is
only payable if:
(a) the insured person dies during the specified period, or term; and
(b) the policy is valid (in force) at the time of death.
This form of cover is an exception to the general rule that a life
insurance always results in a claim. Indeed, in the great majority of
cases, term insurances run their course without a claim. For these
reasons, it is the cheapest form of cover available (but, of course, its
limitations must be understood).
In theory, the term could be for any period of time, even a few hours to
cover an aircraft flight, for example. In practice, it is rare to find a
term insurance for a period of less than one year.
Level/Decreasing/Increasing Term Insurance
(a) Level term insurance : this policy plan is perhaps the most popular
term insurance. It involves a level (unchanging) premium and benefit
throughout the policy period. In the
event of death during the term, the face amount of the policy is
payable. If the term is for more than one year, the renewal premium is
the same each year. Popular largely because of its simplicity, this is a
useful answer to a temporary need which neither increases nor decreases
to any significant extend over the period of time involved (perhaps a
loan which is not being repaid by instalments).
(b) Decreasing term insurance : under this plan, the premium is level
(constant) throughout the term, but the benefit decreases annually, or
at other specified times. Because the benefit is continually decreasing
and is payable only on death during the
term, this is the cheapest form of life insurance available. It is
particularly suited for a temporary need which is reducing. Some typical
examples are:
(i) Credit life : designed to repay the balance of a loan direct to the
lender should the borrower die before all repayment instalments have
been made. This plan is usually sold to lending institutions on a group
basis to cover the lives of borrowers.
(ii) Family income : perhaps linked with other policy plans which
provide a lump sum payment, this plan provides a stated monthly benefit
for the remainder of a specified
period, in the event of say a husband's death (the total amount payable
is therefore decreasing as time goes by).
(iii) Mortgage redemption : a typical mortgage loan is being reduced by
monthly or other periodic payments. This plan covers the balance of loan
outstanding in the event of death.
This may be on a joint-life basis (e.g. husband and wife), the benefit
being payable when the first life dies. This is an obvious and most
popular form of cover.
Note: The above form of cover must
not be confused with Mortgage Indemnity Insurance. This is quite
different, being an insurance for banks and similar lenders. It covers
the possibility of non-repayment of mortgage loans, where the mortgaged
property has to be sold in adverse market situations, thereby resulting
in a loss to the bank etc.
(c) Increasing term insurance : this plan, as the name suggests,
involves a benefit which increases annually, or as otherwise agreed. The
premium also increases proportionately. The increases may be at a fixed
percentage, or in line with an agreed index (e.g. Consumer Price Index).
The basic idea is to keep the benefit in line
with the value of money, especially in case of inflation.
Renewable/Convertible Term Insurance
(a) Renewable term insurance : at first sight, this seems to be a
contradiction, because a term insurance is for a fixed period, and this
extends the period. The key point, however, is that the right to renew
the policy is without submitting evidence of insurability (health) and
the premium for the further period is increased to reflect the increased
age of the life insured. (The new premium is said to be based on the
attained age.) Because such a plan can involve anti-selection, there may
be some limitations applied, such as :
(i) renewals may only be for equal or smaller face values;
(ii) the number of renewals permitted may be restricted (e.g. three
times);
(iii) premium rates may be higher than those for non-renewable policies.
Frequently, one-year term policies are made renewable, either by a basic
policy provision or an added rider. These have the obvious name Yearly
Renewable Term (YRT) or Annually Renewable Term (ART) insurance.
(b) Convertible term insurance : such a plan includes a conversion
privilege, which gives the policyowner the right to convert (change) the
policy to a permanent (non-term) plan without evidence of insurability
(health). If this privilege is exercised, the premium for the wider plan
must be the standard rate for such a plan and the attained age of the
life insured. Because anti-selection is again a possibility with these
plans, there
may be restrictions:
(i) conversion may not be possible beyond a certain age (say 55 or 65);
(ii) conversion may not be possible after the policy has been in force
for say 50% of its specified term (or a specified number of years);
(iii) the face amount of the new plan (permanent insurance) will be
limited to that for the term insurance (probably less after the term
policy has been in force for some specified
time).
Endowment Insurance
An endowment plan provides for the payment of the face amount at the end
of a specified term or upon earlier death. Should the insured person
survive the term, the policy is said to mature. Thus, a claim may arise
under such a plan either by death or maturity. As with a term insurance,
the description of the policy must include reference to the number of
years of the term involved, e.g. a 20-year endowment provides for
payment of the face value after 20 years (on maturity) or upon earlier
death. Features to be noted with this plan are:
(a) Premiums : are not cheap, since under normal circumstances a claim
must arise not later than the specified number of years in the future;
premiums are level, normally paid annually, although single premium
endowments are possible;
(b) Technically : the plan is a combination of a term insurance and a
pure endowment for equal amounts. (A pure endowment is a contract under
which the benefit is only payable if the life insured survives the
term);
(c) Par or non-par : such a plan may be on a participating
(with-profits) or non-participating (without-profits) basis, at an
appropriate premium;
(d) Popularity : because in principle such a plan provides the best of
both worlds (premature death protection and personal savings for the
life insured if the policy matures), these have an apparent attraction.
However, probably because of the relatively high cost of premiums, such
plans do not have great popularity here, nor in many other markets at
present.
Whole Life Insurance
Such a plan, quite literally, involves a policy that is designed to last
the whole of one's life (sometimes it is called whole of life
insurance). The fundamental feature is that the face amount is paid on
death, whenever that occurs, and not before. Such policies, therefore,
may be in existence for many years, even several decades. The relevant
features to note are:
(a) Premiums : are level, but may be subject to different provisions,
including:
(i) payable throughout life : in which event the policy may be called a
straight life insurance, or a continuous premium whole life policy;
(ii) payable for a limited period : the policy may specify a number of
years, after
which no more premiums are payable, although the benefit is not paid
until death takes place;
(iii) premium subject to an age related limitation : instead of
specifying the number of years, the policy may stipulate a certain age
(say 65) after which no more premiums are required. As with (ii) above,
no further premiums are payable if death occurs before the specified
years/age;
(b) Par or non-par : either form of cover is permissible;
(c) Variations : many variations are possible, such as premiums which
increase, or face amounts which change, at specified times during the
policy's life, to cater for different needs as time goes by. One such
variation is called a graded-premium policy, where the premium increases
(against a level face amount) on a regular basis, say every three years,
until it reaches an amount that becomes the level premium for the rest
of the life of the policy.
NON-TRADITIONAL INSURANCE
Life insurance, more or less in its present form, has been practised for
approximately 400 years. During that time, the basic policy formats have
become very established and they still form a practical and useful role
in providing this important form of cover. However, the pattern of
economic and social life does not stand still and new products have been
developed, often providing a more flexible approach to life insurance
cover and associated investment. We look at two such examples.
2.2.1 Universal Life
In an attempt to provide greater consumer choice and flexibility, this
product has been developed. It has been well described as a life
insurance contract which:
(a) is subject to a flexible premium;
(b) has an adjustable benefit; and
(c) accumulates a cash value.
We examine these and other features of this innovative product:
(a) Flexible premium : subject to certain limitations, the policyowner
may pay more or less than the premium stated in a given year, after the
first year. At his option, he can even omit premium payment for a
particular year (again subject to certain conditions).
(b) Adjustable benefit : subject to certain limits, the death benefit
may be increased or decreased, although proof of insurability may be
required for any increase in benefit.
(c) Loading disclosed : the calculation of life insurance premiums
includes an item for expenses, called loading (see 1.3.1a(c)). Normally
this is not disclosed to the insured, but with universal life insurance
the expenses and other charges element is specifically disclosed to a
purchaser.
(d) "Unbundled" cover : the cover is so described because it separates
and
individually discloses, both in the policy and in an annual report (see
(g)
below) to the policyowner the three basic elements of the contract,
i.e.:
(i) the pure cost of protection (covering the death risk);
(ii) investment earnings; and
(iii) company expenses.
(e) Cash value : the intention is that the policy should acquire an
increasing cash value. This of course is heavily influenced by the
amount of premiums paid by the insured. After the first premium,
additional premiums (subject to an individual limit) can be paid at any
time. These, with interest earnings, are added to the cash value after
the deduction of:
(i) a specified percentage expense charge;
(ii) the pure cost of protection (deducted monthly).
(f) Death benefit : according to the plan the insured chooses, this may
be a face amount plus the cash value, or the face amount only.
(g) Annual report : each year the policyowner receives a report which
shows the status of the policy. The information given includes:
(i) the death benefit option selected;
(ii) the specified amount of insurance in force;
(iii) the premiums received during the year;
(iv) the expenses charged during the year;
(v) the guaranteed and excess interest credited to the cash value;
(vi) the pure cost of insurance deducted;
(vii) the cash value balance.
It will be seen that this is a sophisticated product, allowing great
choice to the policyowner to adjust his insurance according to his needs
and financial resources as time goes by. Intermediaries are advised to
consult their principals on local forms of this modern insurance plan.
Unit-Linked Policy
This plan offers a policy with its value directly linked to investment
performance. This may be achieved by formally linking the policy value
to units in a special unitized fund run by the life insurer concerned,
or linking with the units in a unit trust. The value of the units is
directly related to the value of the underlying assets of the fund. This
value may fluctuate according to the performance of the investments
concerned.
A detailed study of this sophisticated financial product is beyond the
needs of this study, and again intermediaries should obtain advice and
instruction from their principals, as necessary. Some features, however,
we may note:
(a) Common principle : unit-linked policies may come in a variety of
forms, but there is a common factor. All or part of the premiums will be
used to purchase units in a fund at the price applicable at the time of
purchase. The value of the policy will then fluctuate according to the
value of the units allocated to it.
(b) Types of funds : a variety of funds may be used for linking
purposes, including equities (ordinary shares), fixed interest
investments and a whole range of cash and other asset funds.
(c) Types of policy : in theory any kind of life insurance product may
be unit-linked. The most common in practice are whole life and
endowments, sometimes with a guaranteed minimum value, however unit
prices may move.
Special care must be taken with products which are essentially
investments, so that the consumer is aware that values may go up or
down.
|
| |
|
