7 - Insurance Contracts and Key Terms

Question 1

For non-insurance contracts, what is the difference between a condition and a warranty?

Answer 1

A condition is a term relating to an important aspect of the agreement (it goes to the root) and a breach can lead to termination of the contract (as well as damages)

A warranty is a minor part only, and breach can lead to a claim of damages but not repudiation of the whole contract

Question 2

Why is it important that the terms of an insurance contract are clearly and strictly confined?

Answer 2

To avoid disputes

Question 3

What are the two principles of interpretation used by the courts when settling a dispute over an insurance contract?

Answer 3

Statutory rules (laid out in legislation)

Common law rules (developed by the courts)

Question 4

Can the courts overturn an exclusion in an insurance contract on the grounds that it is unreasonable or unfair?

Answer 4

No, unless covered by an EC Directive the Insurer is entitled to exclude whatever they want

Question 5

Which act is the main source of Statutory Rules used by the courts in disputes over policy wording?

Answer 5

Consumer Rights Act 2015

Generally there is little statutory control over the wording of insurance contracts

Question 6

If a contract term is found to not be binding under Section 2 of the Consumer Rights Act, what happens to the rest of the contract?

Answer 6

It continues as far as is practical

Question 7

What are the common law rules a court may apply when settling a dispute over insurance contract wording?

Answer 7

1. Ordinary meaning
2. Technical or legal meaning
3. Context (noscitur a sociis)
4. Ambiguity - contra proferentem (against the party that drew it up)
5. Inconsistencies. Hand written or typed words take precedence over pre-printed policy wordings. Endorsements overrule earlier documents, policy docs take precedence over proposals, express terms overrule implied

Question 8

In simple terms, what is a warranty?

In Insurance contracts

Answer 8

A promise made by the Insured about the facts or something which they agree to do or not do

Question 9

What are the two types of warranty?

in terms of time

Answer 9

Present (a promise that something was or is so)

Continuing (a promise that a state will continue)

Question 10

What happens if a warranty is breached?

Answer 10

Cover is suspended from the moment of the breach until the breach is remedied

Question 11

What used to happen if a warranty was breached prior to Insurance Act 2015? What is the leading case for this?

Answer 11

Cover was terminated automatically from the date of the breach.

Bank of Nova Scotia v Hellenic Mutual War Risks Association (Bermuda) Ltd (The Good Luck) (1992) - better known as The Good Luck. This was repealed by the IA 2015.

Question 12

How can warranties be arise?

Answer 12

They can be express or implied (in marine insurance only - in non marine they must be expressly stated)

Question 13

What was a “basis of contract clause”? Are these allowed?

Answer 13

They were used to convert the statements made in the proposal into warranties. They were abolished by CIDRA 2012 and IA 2015

Question 14

What is a condition?

Answer 14

A term that imposes an obligation on the Insured

Question 15

What are the types of condition precedent?

Answer 15

Precedent to the contract - the policy will not come into effect into the condition is met

Precedent to liability - must be complied with prior to a loss in order for the Insurer to be liable. In other words a condition precedent to liability allows an insurer to not pay a claim if the condition is not met

Question 16

What is a collateral or mere condition?

Answer 16

A minor term. If the breach goes to the root the Insurer may repudiate the whole contract. If it is a trivial breach the Insured may still make a claim, but the Insurer may make a deduction for damages (eg if they cannot properly investigate a claim due to late notification)

Question 17

What is an exception or exclusion?

Answer 17

A clause with excuses the insurer from liability when the loss is caused by a particular event, affects a particular type of property, or under some other circumstances

Question 18

What is meant by “terms not relevant to the actual loss”?

Answer 18

The Insurer cannot rely on non-compliance with a term would reduce the risk of a loss of a particular kind, at a particular location, or at a particular time, if the non-compliance could not have increased the risk of the loss that actually occurred

(For example breach of a condition requiring a maintained burglar alarm would not allow an Insurer to repudiate a flood claim - the flood would have happened whether the burglar alarm worked or not!)

Question 19

Can you contract out of IA 2015?

Answer 19

Consumer insurance - You may not contract out if it would leave the consumer in a worse position than the Act provides

Non consumer insurance - You cannot contract out of the section prohibiting basis of contract clauses. Other sections may be contracted out of provided the Insurer draws the Insured’s attention to the consequences of doing so.

Question 20

How do the rules around breach of warranty and condition affect motor insurance?

Answer 20

The Insurer cannot reject a claim from a third party by relying on the Insured breaching a condition or warranty

(They can reject a claim by the Insured, and may have a right of subrogation against their Insured)

Question 21

How do the rules around breach of warranty and condition affect employers’ liability insurance?

Answer 21

Five types of condition and warranty are prohibited by the Employers’ Liability (Compulsory Insurance) Regulations 1998. An Insurer cannot reject a claim on the grounds of late notification, because the Insured has not taken reasonable care, or impose policy excesses/deductibles

Question 22

What is joint or composite insurance?

Answer 22

Two or more persons insured under a single policy

Question 23

What are the main differences between a joint insured and a composite insured?

Answer 23

In a joint policy the interests of the parties is the same. A breach by one is treated as a breach by both

In a composite insured the interests of the insured parties are different. A breach by one only affects the party that caused the breach