2. Basic insurance and legal principles

Question 1

Define an insurance contract

Answer 1

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

Question 2

What are the 8 elements of a valid contract?

Answer 2

1. Offer and acceptance (unconditional acceptance)
2. Consideration (both sides of the bargain)
3. Intention to create a legal agreement
4. Possibility of performance (can the contract be done)
5. Capacity (over 18, of sound mind)
6. Consensus ad idem (both parties believe they are agreeing to the same thing)
7. Legality
8. Certainty (clear and unambiguous requirements)

Question 3

What does void ab initio mean?

Answer 3

Void from the beginning

Question 4

Define insurable interest

Answer 4

the legal right to insure arising out of a financial relationship
recognised at law, between the insured and the subject matter of insurance.

Question 5

How can we create insurable interest?

Answer 5

Common law
Contract
Statute
Statues modifying insurable interest

Question 6

What does good faith mean in insurance contract?

Answer 6

both parties should be open and transparent with each other in the sharing of key information relating to
the risk.

Question 7

What is the legal disclosure requirements of a consumer?

Answer 7

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

Question 8

What is the legal disclosure requirements of a non consumer?

Answer 8

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

Question 9

What is material information?

Answer 9

Physical hazards
Moral hazards

Insured cannot data dump
Insurer must consider whether to the presentation invites further questions

Question 10

What information does not need to be disclosed?

Answer 10

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

Question 11

What are the two questions to ask when a breach of duty of fair representation occurs?

Answer 11

Was it deliberate or reckless?
Was it part of original placement or amendment?

Question 12

What happens if the breach was deliberate or reckless? (burden of proof on insurer)

Answer 12

The insurer can void the policy from the start and retain the premium

Question 13

What happens if the breach was not deliberate or reckless and the contract is original? (burden of proof on insurer)

Answer 13

• 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

Question 14

What happens if the breach was not deliberate or reckless and the contract is varied? (burden of proof on insurer)

Answer 14

• 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

Question 15

What questions are asked when deciding to meet a claim or not?

Answer 15

Is a valid policy in form?
Is the cause of the loss covered under the policy?

Question 16

Define proximate cause

Answer 16

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

Question 17

What are the 3 types of perils?

Answer 17

Insured - named in the policy
Excepted / excluded - named and not covered
Uninsured / unnamed - those perils not mentioned

Question 18

Define indemnity

Answer 18

‘financial compensation
sufficient to place the insured in the same financial position
after a loss as they enjoyed immediately before the loss
occurred.’

Question 19

What settlement options are available to insurers?

Answer 19

Cash - money
Repair
Replacement
Reinstatement - repair damaged machinery

Question 20

What options are available for settlement in property insurance?

Answer 20

• 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

Question 21

What is an agreed value policy?

Answer 21

the value of the subject-matter of the insurance is agreed at the start of the contract and the sum insured is fixed accordingly

Question 22

What is underinsurance?

Answer 22

If the insured understates the value of subject-matter of the
insurance when taking out their policy, there is said to be
underinsurance.

Question 23

What is the average condition?

Answer 23

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

Question 24

What does excess, deductible, and franchise mean?

Answer 24

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

Question 25

Define contribution

Answer 25

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

Question 26

What 5 requirements must be satisfied for contribution to arise?

Answer 26

• common subject matter
• no non-contribution clauses
• Common insurable interest
• insured against common perils
• both policies liable for loss

Question 27

What is the sum insured rateable portion calculation?

Answer 27

Policy sum insured / total sum insured x loss

Question 28

What is the independent liability rateable portion calculation?

Answer 28

independent liability under this policy / total of independent liabilities under all policies × loss

Question 29

Define subrogation

Answer 29

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.