If your Octopus card goes bad, then you take it to a service centre in any MTR station. They'll give you a receipt, and you'll need to return in a few days to get your refund. (Even if the chip is completely bust, there's a blind stamped serial number on the card, so they can determine the unused amount on that card from their usage records.)
Yes. The process is pretty simple, and replacement cards tend to be more robust than their old school predecessors.