3 - Insurance policies

Question 1

What are three main points important about the policy document?

Answer 1

1. the policy will contain the details of the T&Cs
2. the parol evidence rule applies ( the parties can only rely on the contract itself, not on negotiations leading to the contract)
3. the policy is only EVIDENCE of the contract and not the contract itself

Question 2

What form is a policy generally issued in?

Answer 2

A schedule form.
The policy wording is pre-printed (often in a booklet) and a schedule is incorporated into the policy. Also, containing all the variable information and details of the specific risk

Question 3

What does contra proferentem mean?

Answer 3

The contra proferentem rule is a legal doctrine in contract law which states that any clause considered to be ambiguous should be interpreted against the interests of the party that created, introduced, or requested that a clause be included.

Question 4

What is a basic structure of all general insurance policies?

Answer 4

1. Heading
2. Preamble
3. Signature clause
4. Operative clause
5. Exclusions
6. Conditions
7. Policy schedule
8. Information and facilities

Question 5

What will the heading section of a policy contain?

Answer 5

The name of the insurer and, in some cases, the address and company logo.

Question 6

What is the purpose of the recital clause/preamble?

Answer 6

“Sets the scene” - refers to the two parties coming together to form the contract and outlines the purpose of the contract (the insurer promising to indemnify the insured in return for a premium).

Question 7

What is the operative clause (insuring clause) section of a policy?

Answer 7

The heart of the policy, outlining what is covered. There may be several clauses, each dealing with a different aspect of the insurance and often containing exclusions that are specific to the clause concerned.

Question 8

What is a condition?

Answer 8

A contractual term that the insured agrees to comply with during the cover period.

Question 9

What two types of conditions are there?

Answer 9

Express: A condition witch is stated in the policy
Implied: A condition implied by common law that is not expressly stated in the policy

Question 10

What would be contained within the policy schedule?

Answer 10

The schedule contains the variable details of the policy such as the:
- insured’s name and address;
- policy period;
- policy number;
- premium;
- details of the subject matter;
- sum insured or limit of liability;
- special exclusions, conditions or aspects of cover; and
- operative sections of the policy.

Question 11

What may include information and facilities section of the policy?

Answer 11

• definitions,
• a customer service standards statement,
• the complaints procedure and
• claims information.

Question 12

In which policy section would you find the statement ‘This policy is evidence of the contract between us based on the information you gave us in the proposal form.’?

Answer 12

Preamble

Question 13

In which policy section would you find the statement ‘Any claim for theft is dependent on the loss being reported to the police within seven days.’?

Answer 13

Conditions

Question 14

What are the two types of exclusions found in most general insurance policies?

Answer 14

1. General exclusions - apply to all sections of the policy
2. Specific exclusions - apply to specific parts of a policy

Question 15

What is mean by market exclusion?

Answer 15

Some general exclusions are common to all insurance policies

Question 16

What are some common market exclusions?

Answer 16

1. War and related perils
2. Radioactive contamination and explosive nuclear assemblies
3. Terrorism (for commercial insurance, esp property)
4. Pollution/contamination (for property insurance)
5. Cyber risk (except for specialist insurance)
6. Sonic bangs
7. Contractual liability (liability which only exists due to a contract the insured has entered into)
8. Marine (property covered by a marine policy is excluded from a property policy)

Question 17

When terrorism cover can be purchased?

Answer 17

Insurer’s can offer terrorism cover but it must be purchased on an “all-risks” basis, cover all the policy and all property locations. The insurer then reinsures it through a mutual re-insurer, Pool Re, which was setup in collaboration with the UK government and backed by a treasure guarantee. The insurer’s liability is capped per event and year and in Northern Ireland is provided directly by the government.

Question 18

What are the main express conditions?

Answer 18

1. Duties of the insured
2. Alteration
3. Action by the insured in event of a claim
4. Fraud
5. Reasonable precautions
6. Contribution
7. Subrogation
8. Average
9. Arbitration
10. Cancellation

Question 19

What is a reasonable precaution condition?

Answer 19

The insured must take all reasonable precautions to minimise the risk of loss or damage or of incurring liability. They should act in the same way as they would if uninsured.

Question 20

What is the purpose of a subrogation condition?

Answer 20

At common law, the insurer has the right to take over the insured’s rights, following a loss and payment of a claim, to recover the loss from the party responsible.

The policy condition allows the insurer to start to pursue recovery rights before payment of the loss (although the actual recovery of money must take place afterwards).

Question 21

What is the purpose of an average condition?

Answer 21

If the policyholder has ‘under-insured’ - i.e. declared a value for the risk that is less than the full value - thus paying less than the appropriate premium - the insurer reserves the right to pay only a proportion of any claim, in line with the amount of under-insurance.

Question 22

What is an arbitration condition?

Answer 22

This states that any disputes regarding quantum, meaning the amount to be paid in settlement of a claim, will be judged by an independent arbitrator.

Question 23

Jo’s insurer reduces the amount of her theft claim as her shop contents are not insured for their full value.
What is this an example of?

Answer 23

Average
The reduction of Jo’s theft claim due to her being underinsured.

Question 24

Ken’s motor insurer writes to the driver that drove into the back of Ken, for reimbursement of their outlay to repair Ken’s car. What is this an example of?

Answer 24

Subrogation
Subrogation is the condition that allows an insurer to reclaim costs from a third party, such as the one who caused the damage to Ken’s car.

Question 25

Pat has to notify her home insurer that she has turned part of the house into a furniture workshop. What is this an example of?

Answer 25

Alteration
Pat’s actions have led to an increase in the risk her insurer is exposed to. Under the alteration condition, she has an obligation to inform her insurer of this.

Question 26

Give some examples of express warranties

Answer 26

Household - a burglar alarm must be fitted and active
Motor - vehicle kept in a garage overnight
Property - maintained sprinkler system present
Marine - vessel will not travel to a certain place

Question 27

What happens if a warranty is breached?

Answer 27

The insurer’s liability is suspended until the breach is remedied

Question 28

There are three categories of conditions based upon when they must be fulfilled. What are these?

Answer 28

1. Conditions precedent to the contract (before the contract eg implied conditions such as insurable interest)
2. Conditions subsequent to the contract (once the contract is in force eg notification of changes in material circumstances)
3. Conditions precedent to liability (when a claim occurs eg must be notified within a certain timeframe)

Question 29

What was a basis of contract clause?

Answer 29

Representations made during proposal/negotiation were made into warranties.

These were abolished under CIDRA 2012 for consumer insurance and Insurance Act 2015 for commercial.

The only exception to this is if the insurer and insured have agreed to contract out of IA 2015.

Question 30

What is an excess?

Answer 30

An excess is the first amount of each and every claim which is not covered by the policy.
The excess may be:
- compulsory, i.e. imposed by the insurer; or
- voluntary, i.e. accepted by the insured in return for a premium discount.

Question 31

What is a deductible?

Answer 31

A very large excess under a commercial insurance is often called a deductible.

Question 32

What is a franchise?

Answer 32

A franchise is a threshold used to decide whether any claim payment is made. No payment is made for any claim falling below the franchise; however, claims that exceed the franchise are paid in full. Time franchises are common with sickness cover under personal accident and sickness insurance policies.

Question 33

Your business has a policy with a franchise of £10,000. How much would your insurer pay in the event of a claim worth:
A) £5,000?
B) £12,000?

Answer 33

A) Nothing
B) £12,000

Question 34

You have a car insurance policy with a compulsory excess of £200 and a voluntary excess of £150. How much would the insurer pay for a claim of:
A) £300?
B) £1,000?

Answer 34

A) Nothing
B) £650

Question 35

Under FCA rules, a complaint from a customer is regarded as ‘unresolved’ after:
A. 8 weeks.
B. 2 weeks.
C. 4 weeks.
D. 4 days.

Answer 35

A) 8 Weeks

Question 36

Joe insures his household contents for £10,000. He has a claim for £1,800 and at the time of the loss the replacement value of all his contents is £15,000. How much will his insurers pay, if anything?
Select one:
a. £1,200.
b. £600.
c. £1,800.
d. Nil.

Answer 36

a) Average: value insured/value at risk x the loss
10,000/15,000x1,800 = £1,200

Question 37

An insured has breached a relatively minor warranty on a non-consumer insurance policy. Following the Insurance Act 2015, if the insured subsequently made good this breach, what would the position be?
Select one:
a. The insurer is always discharged from their liability from inception [known as ab initio].
b. The insurer is discharged from any liability under the policy from the date of the breach. If the insured repaired the breach at a later date, the insurer’s liability would start again from the date the breach was repaired.
c. The insurer must demonstrate the fair treatment of customers and in this case, it must consider the materiality of any breach to losses incurred and act proportionately.
d. The insurer is irreversibly discharged from any liability under the policy from the date of the breach.

Answer 37

b. The insurer is discharged from any liability under the policy from the date of the breach. If the insured repaired the breach at a later date, the insurer’s liability would start again from the date the breach was repaired.

Question 38

When an insured is in breach of a condition precedent to liability, what action are the insurers legally entitled to take in respect of a claim?
Select one:
a. Pay the claim and load the premium.
b. Decline the claim and also cancel the policy.
c. Pay the claim and continue the policy cover.
d. Decline the claim but the policy will continue in force.

Answer 38

d. Decline the claim but the policy will continue in force.

Question 39

What type of insurance is likely to require the most extensive policy document?

a. A commercial combined policy.
b. A motor policy.
c. A commercial fire policy.
d. A public liability policy.

Answer 39

a. A commercial combined policy.

Question 40

With a general insurance policy, why is radioactive contamination and its consequences excluded?
a. The potential losses are regarded as being too large for the insurance market as a whole.
b. It is generally considered to be a speculative risk.
c. It is generally regarded as being the responsibility of the State.
d. The potential losses are seen as being beyond the capacity of individual insurers.

Answer 40

d. The potential losses are seen as being beyond the capacity of individual insurers.