4 UK Insurance Contract and Trust Law

Question 1

State the five main elements in the formation of a valid contract. (5)

Answer 1

1. The intention of both parties to the contract to create a legal contract.
2. An agreement, achieved through an offer and acceptance of mutually understood terms.
3. A consideration (something of value):
   
   • From the policyholder: the premium
   • From the insurer: the promise to pay the benefit(s)
4. Legal capacity - the ability to enter into a contract.
5. Absence of various factors that would make the contract void or voidable (misrepresentation, mistake or illegality).

Question 2

Describe the concept of trusts and state why they are commonly used in life assurance. (5)

Answer 2

A trust is a legal concept. It is the relationship that arises wherever…

…a person, the trustee is compelled to hold assets (often financial)…

…for the benefit of others (the beneficiaries) or for some purpose permitted by law…

…in such a way that the real benefit of the property accrues not to the trustee but to the beneficiaries or other purpose of the trust.

Trusts are often used in life assurance so that benefits paid on death are held under the trust and are not considered part of the insured person’s estate for inheritance tax purposes.

Question 3

Describe the five main types of trust. (5)

Answer 3

1. Absolute - where it is not possible to change who benefits from the trust after it is set up. The assured cannot benefit from an absolute trust.
2. Discretionary - allows the assured to take an income from the fund whilst alive. Gives the trustees discretion regarding the payment of benefits.
3. Flexible - allows the amount in the trust to be adjusted whilst the assured is alive, between the current and potential future beneficiaries.
4. Interest in possession - the beneficiaries have a right to the income paid on the investment in the trust.
5. Pension - enables the assured to express a wish for the recipient of the benefits on death before retirement.

Question 4

State eight general requirements of contract terms. (8)

Answer 4

1. Must be fair.
2. Must be drafted so that consumers can easily understand them.
3. Can exist in any document a consumer signs or in a poster or in what a salesperson says to a customer before purchase.
4. Cannot contain unfair penalties e.g. for cancellations.
5. Should clearly set out legitimate cancellation rights.
6. Should clearly explain if any (reasonable) charges are payable.
7. Should clearly set out what, when and how a contract might be varied.
8. Should set out how a contract might be renewed and any price for doing so.

Question 5

State four key responsibilities of the Financial Ombudsman Service. (4)

Answer 5

1. Making rules for processing complaints and for their investigation, consideration and determination.
2. Making rules relating to the award of cost.
3. Making rules for the levying of case fees.
4. Reporting to the regulator (the FCA) on the discharge of its functions and publishing that report.

Question 6

List the nine protected characteristics covered by the Equality Act 2010. (9)

Answer 6

1. Age
2. Disability
3. Gender reassignment
4. Marriage and civil partnership
5. Pregnancy and maternity
6. Race
7. Religion and belief
8. Sex
9. Sexual orientation.

Question 7

Describe direct and indirect discrimination. (5)

Answer 7

1. Direct discrimination is defined as treating someone less favourably due to a protected characteristic.
2. However, differentiation on the grounds of age is not discrimination, if it can be shown it is a proportionate means of achieving a legitimate aim.
3. Indirect discrimination occurs when a policy that applies equally to everybody, disadvantages people with a protected characteristic because they have that characteristic.
4. Again, such treatment is not discrimination if it can be shown it is a proportionate means of achieving a legitimate aim.
5. Indirect discrimination applies to all protected characteristics except pregnancy and maternity.

Question 8

Describe the EU Gender Directive as it applies to UK Insurers. (5)

Answer 8

1. Passed in 2004 for the purposes of equal treatment between men and women in the access and supply of goods and services.
2. It originally had an opt-out for financial services but in 2011 the ECJ ruled the opt-out invalid.
3. The opt out was removed with effect from 21/12/12 and since then gender has not been allowed as a rating factor for new business.
4. Reviewable premiums are not treated as new business in this regard.
5. Insurers need to be careful not to use proxy rating factors that might be deemed indirect discrimination.

Question 9

Describe the duties of a customer providing information to a life insurance company before entering into a contract and name the relevant legislation.

Answer 9

1. Under the Consumer Insurance Act 2012.
2. Customers are under a duty to take reasonable care to:
   
   • Answer the insurer’s questions accurately and fully.
   • Not make misrepresentation before entry into the contract or on variation.
3. Misrepresentations equate to representations that are misleadingly inaccurate or incomplete.
4. Failures by consumers to fulfil insurers’ requests to confirm or amend particulars provided can equate to misrepresentations.