5 - Insurance Contract Formation and Insurable Interest

Question 1

What is an MRC?

Answer 1

Market Reform Contract

A standard form of contract used in Lloyd’s to help comply with contract certainty

Question 2

Is communication of acceptance necessary in insurance contract?

Answer 2

At inception yes. At renewal it may not be, for example motor insurance a renewal notice is issues. If the insured receives this notice and continue to use the car it is deemed that they have accepted the offer even if they have not informed the insurer

Question 3

What terms must be agreed upon in an insurance contract for there to a consensus ad idem and the contract be valid?

Answer 3

Nature of risk
Subject matter
Duration of cover
Amount of premium (or method to be calculated by)

Question 4

Does renewal of insurance constitute a new contract, or a continuation of the old one?

Answer 4

A new contract is formed

Question 5

When does an insurance contract come into existence?

Answer 5

Once the offer is accepted, even if cover is not effective until a date in the future the contract exists and is binding but the risk has not yet attached

Question 6

What is the consideration in an insurance contract?

Answer 6

From the insurer it is the promise to pay valid claims

From the insured it is the promise to pay the premium

Question 7

What are the general rules around when an insured is entitled to a return of premium?

Answer 7

Once a risk has started to run the insured is not entitled to any return of premium unless stipulated in the contract. It is usual for an insurer to allow a partial pro-rata return when cancelled mid-term with conditions

If the risk has never started to run the insured is entitled to a return of premium

Question 8

What is the only insurance contract which must be in writing?

Answer 8

Marine

Question 9

What is insurable interest?

Answer 9

A right to insure from a financial relationship, arising in law, between the insured and the subject matter of insurance

In short, the insured must be in a position to suffer a loss if an event which they have insured against occurs

Question 10

What are the key elements of insurable interest?

Answer 10

Subject matter
Economic/financial interest
Current interest
Legal interest

Question 11

When you take out a home insurance policy, what are you actually insuring?

Answer 11

Your interest in the property

Question 12

Is expectancy of insurable interest enough to satisfy the requirements of insurable interest?

Answer 12

No - the insurable interest must be current

Question 13

What is the leading case on expectancy of insurable interest?

Answer 13

Lucena v Craufurd (1806)

Question 14

What is the leading case where it was held that a legal interest is required for insurable interest?

Answer 14

Macaura v Northern Assurance Co Ltd (1925)

Also called the Macaura principle

Question 15

Why does the law require insurable interest?

Answer 15

To reduce moral hazard

To discourage wagering

Question 16

What are the two ways insurable interest may arise?

Answer 16

1. Common law (eg ownership)

2. Contract (acceptance of liability eg tenancy agreement or reinsurance)

Question 17

When does insurable interest need to exist in marine insurance?

Answer 17

At the time of loss only

Question 18

When does insurable interest need to exist in life insurance?

Answer 18

At inception only

Question 19

When does insurable interest need to exist in general insurance other than marine or life?

Answer 19

At inception and at loss

Question 20

A life insurance policy is deemed void due to lack of insurable interest. Is the policyholder legally entitled to a return of premium?

Answer 20

Legally no. The contract is deemed to be illegal due to the lack of insurable interest and no recovery can be made under an illegal contract provided the parties are in pari delicto (equal in wrongdoing)

In practice an insurer would return premium for reputation reasons and the Financial Ombudsman has made clear that they should

Question 21

What are the two main categories under which insurable interest can arise for life insurance?

Answer 21

Family relationships and business relationships

Question 22

Under English law what family relationships automatically give an insurable interest?

Answer 22

Spouses - husbands and wives are automatically held to have unlimited insurable interest in each other.

No other family relationship gives an automatic insurable interest. You are held to have an unlimited insurable interest in your own life

Question 23

What business relationships can create insurable interest for life insurance?

Answer 23

Employer and employee - limited to their salary during their notice period

Creditor - up to the amount of the debt

Partners - up to the amount of any loss that may arise

Question 24

How can insurable interest be created for property insurance?

Answer 24

Owners of property (either outright, part or joint)
Landlord and tenant
Mortgages
Executors/trustees
Bailees
Finders and people in possession
People living together (eg sharing property)

Question 25

How is insurable interest for property insurance limited if the person only has a limited interest in the property?

Answer 25

They can insure the interest for it’s full value but can only retain payments up the value of their interest, with any extra being held in trust for the other person or people with interest in the property

Question 26

What should be done to avoid double insurance when overlapping insurable interests exist?

Answer 26

The parties will normally agree who should be responsible for arranging insurance

For example in a mortgage agreement or leasehold