2. Basic insurance legal principles and terminology Flashcards
Define ‘Contract’
An agreement, enforceable by law, between two or more people to do, or abstain from doing, some acts, their intention being to create legal relations
What are the parts that form an insurance contract?
Agreement
Enforceable by law
Two or more parties
Intention to create legal relations
Insurable Interest
How is contract formed?
Offer & Acceptance
Consideration
Define ‘Insurable Interest’
The legal right to insure arising out of a financial relationship recognised at law, between the insured and the subject matter of insurance. (Needed for insurance contract)
Types of contract acceptance
Unconditional
Conditional (Counter)
Postal
How does postal acceptance differ in insurance?
Usually contract formed when acceptance received.
Insurance - Contract when acceptance letter sent.
What is consideration in the context of insurance?
Insurer agrees to pay claims
Insured agrees to pay premium
Definition of ‘Insurable Interest’?
The legal right to insure arising out of a financial relationship recognised at law, between insured and the subject matter of insurance
What is the duty of good faith
How does the duty of good faith apply to each party in an insurance contract?
Insured - Must disclose material facts about risk
Insurer - Not add new terms or hide info about pricing or deals
What are the two key concepts surrounding the duty of disclosure?
Disclosure / Non-Disclosure
Representation / Misrepresentation
What is the legal position regarding the duty of good faith if the insured is a consumer?
Consumer has duty to take reasonable steps not to make misrepresentations to insurer.
Insurer must show they would not have entered / would on different terms.
What is the definition of a ‘consumer’ for the purposes of buying insurance?
Someone who is buying insurance wholly or mainly for purposes unrelated to business, trade or profession
What makes a misrepresentation in contract negotiations ‘reckless or deliberate’?
Knew it was untrue/misleading
&
Knew the matter was relevant to insurance
What is the legal remedy for insurer if misrepresentation is reckless
Avoidance of contract
Refuse all claims
No return of premium
Legal remedy for insurer if misrepresentation is merely careless during claims period
Depends what insurer would have done if they knew:
Not entered on any terms = Avoidance & Return premium
Different terms = Act as if it was on those terms
If entered but higher premium = Less payout for claims
Legal remedy for insurer if misrepresentation is merely careless & not found during claims period
Not entered on any terms = Avoidance & Return premium
Different terms = Act as if it was on those terms
Insurer can give notice of termination / variation (return premium)
Insured can give notice to terminate
*Claims during notice period considered in usual way
What is the legal position if the insured is not a consumer?
Insured must make a ‘fair representation’ of risk to insurer
What is the definition of fair representation?
Disclosure of facts insured knows or ought to know
Disclosure of info which a prudent insurer would ask further questions on
At what time do you need insurable interest?
Life = Inception, but not time of loss
Marine = Time of Loss, Not inception
General insurance = Both (Anticipated interest may suffice at inception)
How is insurable interest created
Common Law
Statute (Can also be modified by statute)
Contract
What is the definition for what is considered ‘Material’
Material which would influence the judgement of a prudent insurer in fixing the premium or determining whether he will take the risk.
What changes to materiality did the Insurance Act bring in?
Insured cannot data dump - Must present info clearly and accessible way
Burden to ask further questions is on insurer
What is information the insured ‘ought to know’
Anything found by a reasonable search of information available to the insured
What does s.6 Insurance Act say classes as what the insured ‘knows’
Any information they suspect but deliberately refrain from confirming
What does the insured not have to disclose
What insurer knows / Ought to know
What insurer is ‘presumed to know’
Anything that lessens the risk
Matters of law
What is classed as information the insurer ‘ought to know’
If known by employee of insurer and would reasonably be passed on
If accessible within company
What is classed as information the insurer ‘presumed to know’
Things common knowledge
Things insurer operating in this class of business would reasonably be expected to know
What are the steps to determine remedy for breach of duty of fair presentation / disclosure
- Reckless
- When did the breach occur? (Original or Variation)
How does compulsory insurance impact the duty of disclosure
Law is concerned with ensuring innocent victims are compensated and thus insurers must pay all property damage or personal injury claims from compulsory legislation.
What is the remedy for breach of duty to disclose during original placement?
Reckless - Void & Keep premium
Careless
- If insurer had not entered - Void contract but return premium
- If insurer would have entered on different terms - Those terms are used
- If charge higher premium - Less claim payout
What are the remedies for breach of duty to disclose during variation of contract? (Same or higher premium)
If insurer would not have agreed - Treat original contract as continuing and return extra premium
Agreed variation but on different terms - Contract treated as those changes.
What are the remedies for breach of duty to disclose during variation of contract? (Lower premium)
If insurer would not have agreed - Treat contract as if changes did not occur & lower claim payout in proportion of the premium
If agreed on different terms - These terms accepted as new contract.
Why do insurers have an issue with the duty of disclosure?
Insured are under no obligation at common law to provide material information after inception.
How is the insurers right to information an issue
If insurer fails to ask follow up questions to any information provided, this right is said to be waived.
But… insured is not considered to have failed to disclose material facts.
How does Estoppel impact insurance contracts
Insurer must not lead insured into false sense of security.
When must insurer notify insured they do not intend to renew policy?
‘Good time’ to allow them to make other arrangements
What are the cancellation rights to insurance policy
Insurer - Written notice (14 days)
Insured - Not common, unless insurer entitled to charge short term period rates for term gone
What does fulfilment mean
The contract has been fulfilled (E.g reached limit) and is ended
When is an insurance contract void
When insured has breached policy condition
Summarise what the insurance act says
Insured cannot data dump (Present in clear way)
Insured knowledge extends to broker
Insured ought to know - Reasonable search available
Insured knows anything they suspect but do not confirm
Insurer ought to know anything employee knew and reasonably be expected to pass on
Insurer presumed to know - Insurer operating in that field / Common knowledge
Define proximate cause
Active, efficient cause that sets in motion a train of events which brings about a result, without the intervention of any force started and working actively from a new and independent source.
What are the three categories of perils?
Insured Perils - (Named as insured)
Expected Perils - (Named as NOT insured)
Uninsured - Unnamed in policy
Define Indemnity
Financial compensation sufficient to place the insured in the same financial position after a loss as they enjoyed immediately before the loss occurred
Benefit policy
Policy which provides fixed benefits (usually Accident & Sickness) where indemnity is not possible / accurate (E.g loss of leg)
Impossible to place someone in same position as before loss
Possible ways of indemnifying someone
Whatever is stated in policy:
Cash
Repair
Reinstatement
Replacement
Insurers issue with reinstatement as means of indemnification
Insurers are their own insurers during this period of reinstatement
Work may go above sum insured, but they must continue
What is usually the limit of indemnity
Sum Insured (But can have no limit)
What is the sum insured?
Total value declared by insured
What is the principle of Underinsurance / Average condition
When the insured has undervalued the risk, they are their own insurer for the uninsured bit
(Even partial losses are split between insurer and insured based on proportion of underinsurance)
Formula for underinsurance
(Sum insured / Value of all goods at risk) x Loss
Contribution
‘The right of an insurer to call upon others similarly, but not necessarily equally, liable to the same insured to share the cost of indemnity’
(Insurers contribute to claim on basis or their Rateable Proportion)
What is necessary for contribution to exist
- Common subject matter
- Insurable interest is the same (same relation to the risk)
- Insured against common perils
- Both policies liable for the loss
- No non-contribution clause
Formula for Contribution
(Policy sum insured / Total sum insured) x Loss
Subrogation
‘Right of insurer following payment of claim, to take over the insured’s rights to recover payment from third party responsible for loss’
What is the limit of subrogation
The amount paid out for the insurance claim
