General Principles of Insurance and the Hong Kong Insurance Market
Domain 1 tests the doctrines underneath every policy - indemnity, insurable interest, utmost good faith, proximate cause, contribution and subrogation - and the structure of the Hong Kong market that applies them.
Indemnity
General insurance restores the insured to the pre-loss financial position: no better, no worse. Hence depreciation and betterment deductions, the sum insured as the maximum liability, and replacement cover only where expressly purchased.
Three doctrines in one line each
- Insurable interest: a financial interest in the subject matter. For indemnity business it must exist when the loss happens; life insurance differs, requiring interest at inception.
- Utmost good faith: each side discloses material facts, the test being whether a prudent insurer would be influenced in fixing premium or terms. Breach lets the insurer avoid from inception.
- Proximate cause: the dominant, effective cause. If an excluded peril sets an unbroken chain in motion, a later exception does not restore cover.
Contribution is not subrogation
Contribution is insurer-to-insurer, dividing one loss between policies covering the same interest. Subrogation is insurer-versus-wrongdoer, available only after the insured is fully indemnified and never recovering more than was paid out.
Market structure
Insurers carrying on business in Hong Kong must be authorised by the Insurance Authority under the Insurance Ordinance (Cap. 41). Distribution runs through agents, brokers and bancassurance, all licensed by the IA since 26 June 2017; loss adjusters and surveyors support claims, the Motor Insurers' Bureau meets uninsured and untraced driver claims, and eligible monetary disputes go to the Financial Dispute Resolution Scheme. The market is heavily reinsurance-dependent, so local capacity and terms often reflect treaty renewals at 1 January.
Worked example
A building is insured with Insurer A for HK$1m and Insurer B for HK$3m under rateable fire policies. A HK$200,000 fire loss is shared rateably: A pays 200,000 × 1/4 = HK$50,000 and B pays HK$150,000. Where the policies protect different interests, such as owner and mortgagee, the independent liability method replaces rateable contribution because each policy is assessed on its own terms.
Traps that cost marks
Treating the sum insured as the value of the property; demanding replacement cost where the policy indemnifies on depreciated value; mixing the timing of insurable interest between general and life business; expecting a subrogation recovery to top up the insured's claim beyond a full indemnity; confusing contribution with subrogation when two policies respond to one fire.