2. Basic insurance and legal principles Flashcards
Define an insurance contract
an agreement, enforceable by law, between an insured and an insurer.
The insured agrees to pay a premium to the insurer and
abide by the terms and conditions of the policy. In return, the insurer agrees to pay to the insured a sum of money or provide something of monetary value, on the happening of a specified event, e.g. the submission of a claim
What are the 8 elements of a valid contract?
- Offer and acceptance (unconditional acceptance)
- Consideration (both sides of the bargain)
- Intention to create a legal agreement
- Possibility of performance (can the contract be done)
- Capacity (over 18, of sound mind)
- Consensus ad idem (both parties believe they are agreeing to the same thing)
- Legality
- Certainty (clear and unambiguous requirements)
What does void ab initio mean?
Void from the beginning
Define insurable interest
the legal right to insure arising out of a financial relationship
recognised at law, between the insured and the subject matter of insurance.
How can we create insurable interest?
Common law
Contract
Statute
Statues modifying insurable interest
What does good faith mean in insurance contract?
both parties should be open and transparent with each other in the sharing of key information relating to
the risk.
What is the legal disclosure requirements of a consumer?
Duty to take reasonable care to not make a misrepresentation
Insurer should prove that without the representation, they would not have entered, or amended terms
Innocent misrepresentation is fine
Insurers must not unreasonably reject a claim
What is the legal disclosure requirements of a non consumer?
Fair representation which means: one which makes disclosure of every material circumstance which the insured knows or ought to know, or disclosure which gives insurers sufficient information to put a prudent insurer on notice that it needs to make further enquiries
What is material information?
Physical hazards
Moral hazards
Insured cannot data dump
Insurer must consider whether to the presentation invites further questions
What information does not need to be disclosed?
Matters of law
Public knowledge
Factors that lessen the risk
Information waived by insurers
Information a survey should reveal
Information that the insured does not know
What are the two questions to ask when a breach of duty of fair representation occurs?
Was it deliberate or reckless?
Was it part of original placement or amendment?
What happens if the breach was deliberate or reckless? (burden of proof on insurer)
The insurer can void the policy from the start and retain the premium
What happens if the breach was not deliberate or reckless and the contract is original? (burden of proof on insurer)
- If insurer would not have entered - contract is void and premium returned
- if insurer would enter on different terms - contract treated as if those terms exist
- If insurer would charge more - they pay the % of premium they received x claim amount
What happens if the breach was not deliberate or reckless and the contract is varied? (burden of proof on insurer)
- If deliberate or reckless, void from variation and premium retained
- If not deliberate or reckless and the premium stayed the same or increased then
– If the insurer would not have agreed, treated as though no change
– If insurer would have agreed on different terms (inc more premium) then terms are applied and claims paid proportionally - If not deliberate or reckless and premium reduced then:
– if not agreed, treated as if the change never happened, but claims are penalised
– if the insurer would agree on different terms, those terms apply
What questions are asked when deciding to meet a claim or not?
Is a valid policy in form?
Is the cause of the loss covered under the policy?
Define proximate cause
The proximate cause of an occurrence is always the
dominant cause and there is a direct link between it and the
resulting loss. A single event is not always the direct cause of
a loss: a loss sometimes occurs following a train of events
What are the 3 types of perils?
Insured - named in the policy
Excepted / excluded - named and not covered
Uninsured / unnamed - those perils not mentioned
Define indemnity
‘financial compensation
sufficient to place the insured in the same financial position
after a loss as they enjoyed immediately before the loss
occurred.’
What settlement options are available to insurers?
Cash - money
Repair
Replacement
Reinstatement - repair damaged machinery
What options are available for settlement in property insurance?
- Cost of repair or reconstruction
- Reinstatement memorandum: sum insured represents full value at time of reinstatement
- Day one reinstatement: insured states the reinstatement amount on day 1 of cover
What is an agreed value policy?
the value of the subject-matter of the insurance is agreed at the start of the contract and the sum insured is fixed accordingly
What is underinsurance?
If the insured understates the value of subject-matter of the
insurance when taking out their policy, there is said to be
underinsurance.
What is the average condition?
The insured is considered to be their own insurer for the amount they have chosen not to insure if there is underinsurance at the time of any loss
What does excess, deductible, and franchise mean?
Excess - first amount of claim paid by insured, insurer will pay full policy limit above this
Deductible - first amount paid by insured, deducted from total policy limit
Franchise - first amount paid by insured unless claim reaches a threshold and insurer pays everything
Define contribution
The right of an insurer to call upon others similarly, but not necessarily equally, liable to the same insured to share the cost of an indemnity payment’.
Cost shared is rateable portion
What 5 requirements must be satisfied for contribution to arise?
- common subject matter
- no non-contribution clauses
- Common insurable interest
- insured against common perils
- both policies liable for loss
What is the sum insured rateable portion calculation?
Policy sum insured / total sum insured x loss
What is the independent liability rateable portion calculation?
independent liability under this policy / total of independent liabilities under all policies × loss
Define subrogation
the right of an insurer
following payment of a claim, to take over the insured’s
rights to recover payment from a third party responsible
for the loss.
