Essay question (homework): (15 marks)

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Risk Management Classwork (Lesson 6-8)

A Multiple Choice: (10 marks)

1. A firm engaging in retail business in a country suffering from civil war will be difficult to get accepted by insurance company for taking out insurance protection on its property because such is:

a) A speculative risk b) A pure risk

c) An adverse selection d) Lack of Insurable interest

Ans: c

2. A firm may find it difficult to take out a fidelity insurance policy for a worker working for a totally unrelated company because such is

a) A speculative risk b) A pure risk

c) An adverse selection d) Lack of insurable interest

Ans: d

3. A cake shop has a motor insurance policy of coverage limit up to $1 million.

The vehicle was damaged last month and the actual loss was $0.2 million.

Based on the principle of indemnity, how much compensation would the cake shop normally get:

a) $ 0.2 million b) $ 0.8 million c) $ 1 million d) $1.2 million

ans: a

4. An employee stole the money from the cash register. Such loss can be covered by

a) liability insurance b) public liability insurance

c) employees’ compensation insurance d) fidelity insurance

Ans: d

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5. An employee teamed up with outside parties to steal money from the company. Such loss can be covered by

a) liability insurance b) public liability insurance c) fidelity insurance

d) employees’ compensation insurance Ans: c

6. Which of the following would be the indirect loss of a restaurant after its whole kitchen was destroyed by a fire?

a) Loss of the fixtures in the kitchen b) Loss of the cookware in the kitchen c) Loss of business due to no kitchen d) Loss of foodstuff in the kitchen

Ans: c

7. Which of the following insurances can help a business to cover the damage on the company’s lorry during a car accident caused by the company driver during the course of business?

a) Motor insurance with third party coverage only b) Motor insurance with comprehensive coverage c) fidelity insurance

d) Employees’ compensation insurance Ans: b

8. Which of the following insurances is required by the law in Hong Kong?

a) Fidelity insurance b) Public liability insurance

c) Motor insurance on third party coverage only d) Motor insurance on comprehensive coverage

Ans: c

9. Liability insurance is for covering

a) loss incurred when a company fails to pay off its debts b) loss incurred when a company fails to collect its loans

c) loss due to the claim from third party for the damage done to which the company is not liable

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d) loss due to the claim from third party for the damage to which the company is held liable

Ans: d

10. Which of the following is true:

a) The motor insurance covers death or injury to third party b) The motor insurance is required by law in Hong Kong

c) The motor insurance will pay compensation to third party regardless who cause the accident

d) The motor insurance will pay compensation to third party only when the insured is liable

Ans: d

(1 mark each, total = 10 marks)

B Short questions (classwork): (15 marks)

1. Explain the concept of insurable interest with an example. (5 marks) Ans

Insurable interest refers the potential that the insured may suffer from a direct/indirect loss in an event, even in case that impairment or damage of the insured object is absent

e.g. Tom would have insurable interest of his factory because he would suffer if the factory is on fire.

2. Illustrate with an example the protection provided by a motor insurance with

third party coverage only. (5 marks)

Ans:

It covers the loss on death and injury of the third party plus damage to his/her property from the car accident that the insured is liable e.g. the insured car knocked down a pedestrian because of the fault of the insured 3. Describe what losses will the employees’ compensation insurance cover.

(5 marks) Ans:

It covers the liabilities to employees who die or injured as a result of an accident arising out of and in the course of employment both under the Employees’ Compensation Ordinance and the common law

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C Essay question (classwork): (15 marks)

Alfred is thinking about establishing a school bus team serving mainly secondary schools in Kowloon. However, he found that the motor insurance premium is quite high to cover such a large team of vehicles. Evaluate if other risk

management strategies can be adopted to replace the insurance or reduce its insurance premium.

Ans:

Evaluation:

- Risk avoidance should not be applicable since Alfred’s major business involves vehicle, avoiding vehicle related risks would mean totally out of business - Risk prevention/reduction strategy could be adopted:

o Having good maintenance on vehicles o Hiring of well-trained drivers

o Monitoring drivers’ behavior closely

o Better scheduling and job allocation to reduce driver fatigue and depreciation of vehicles

o Avoid overloading the vehicles

 lower accident rate can surely reduce insurance costs

(3 marks each, max = 9 marks) - Risk assumption:

o Motor insurance with third party coverage cannot be waived o Damages to school buses can be repaired by the company

 part of the insurance costs can be absorbed

(3 marks each, max = 6 marks)

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Risk Management Homework (Lesson 6-8)

A. Multiple Choice (10 marks)

1. In a cinema, an employee failed to dry the floor after some customers had split their drinks on the floor. Later on another customer fell on the spot owing to the slippery condition. Will public liability insurance cover such situation?

a) Yes, because it is the employee’s fault

b) No, because it is the employee’s but not the owner’s fault c) No, because it is the fault of other customers

d) No, because it is the fault of the fallen customer Ans: a

2. Which of the following insurances does NOT help cover a business’s potential liability to injured people:

a) Public liability insurance

b) Employees’ compensation insurance c) Fidelity insurance

d) Motor insurance Ans: c

3. Employer is liable to the compensation under Employees’ Compensation Ordinance for any injury to his employee as a result of an accident

a) Arising out of and in the course of employment regardless whether it is employee’s fault or not

b) Arising out of and in the course of employment but not due to employee’s fault

c) Arising out of and in the course of employment but should be to other people’s fault

d) Arising out of and in the course of employment but should be due to employer’s fault

Ans: a

4. Which of the following is correct?

a) The employees’ compensation insurance covers only full-time employees b) The employees’ compensation insurance covers only those who work for

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certain amount of hours for the company per month

c) The employees’ compensation insurance covers only permanent employees

d) The employees’ compensation insurance covers all employees, irrespective of the length of employment contract or working hours, full-time or part-time employment

Ans: d

5. Which of the following are covered by the public liability insurance taken out by a coffee shop?

I. A customer gets hurt in the shop due to the fault of the store’s owner II. A customer gets hurt in the shop due to the fault of the store’s employee III. A customer gets hurt in the shop due to the fault of another customer IV. A customer gets hurt in the shop due to the fault of himself

a) I and II b) I and III c) III and IV d) II and IV Ans: a

6. Which of the following will most likely be covered by public liability insurance taken out by a toy shop?

a) A customer gets hurt when playing with the toy after purchase in the shop owing to incorrect instructions given by the shop keeper

b) With no instruction given by the shop keeper, a customer gets hurt when playing with the toy after purchase in a public area

c) A customer gets hurt when playing with the toy after purchase at home d) A customer gets hurt when playing with the toy after purchase on the

road when going back home Ans: a

7. The injured employee can claim compensation under common law if a) He can prove it is not his fault for getting injured during work b) He can prove it is the employer’s fault for his injury during work c) He is injured during work

d) He has tried his best to avoid getting injured during work Ans: b

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8. An employer can do the following to reduce the possible claims for public liability except:

a) train the employees well in doing their work

b) improve the environment to reduce potential hazards c) maintain the facilities in good conditions

d) prohibit any employee from entering the company’s public area Ans: d

9. Insurance can help cover the following loss of a fashion shop except:

a) Damage to the premise due to fire b) Loss of inventory due to fire c) Loss of sales due to bad weather

d) Damage to the company car due to bad weather Ans: c

10. For company with employees, which of the following insurances cannot be waived even if the magnitude of the associated risk is minimum?

a) Employees’ compensation insurance b) Public liability insurance

c) Fidelity insurance

d) Motor insurance with comprehensive coverage Ans: a

(1 mark each, total = 10 marks)

B. Short questions (homework): (15 marks)

1. What insurance needs to be taken out to deal with the cheating behavior of employee? Explain the coverage of this insurance. (5 marks) Ans:

Fidelity insurance should be taken out for losses owing to dishonesty act of employee. It covers also the joined act between dishonest employee and outside party. However, it will not cover the loss due to employee’s incompetence

2. Distinguish between motor insurance with third party coverage only and motor insurance with comprehensive coverage. (5 marks) The third party part covers the loss due to the death or injury of third party as well as damage to his property during a car accident in which the insured is held liable. The insurance is required by the law in Hong Kong. Meanwhile, the comprehensive part covers all the losses due to many other types of

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hazards causing damages to the insured car such as fire, theft, floods etc in addition to third party coverage. However, it is not compulsory by law.

3. Distinguish between compensation under the Employees’ Compensation

Ordinance and the common law? (5 marks)

Ans:

Employee can get a compensation under the Employees’ Compensation Ordinance if he was injured at work during employment regardless it is his fault or not. However, compensation at common law can only be awarded when the employee can prove that it is the employer’s fault causing the injury.

The compensation under the Employees’ Compensation Ordinance does not preclude employee’s right to take action for common law’s compensation. If the employee can get a claim under the common law, the amount

compensated under the Employees’ Compensation Ordinance should be deducted.