Chapter 1: Material Information Flashcards
What are the three essential elements for a contract to be legally binding?
An offer, acceptance of the offer, and consideration.
What is the basis of an insurance contract?
An insurance contract is based on the promise to do something if a certain set of circumstances occur, in exchange for payment of the premium.
Why is the principle of good faith important in insurance contracts?
As the promise is not tangible until a loss occurs, the contract is governed by the legal principle known as good faith which imposes a duty that a proposer must provide all information asked for by the insurer.
What principle did the Marine Insurance Act 1906 establish?
Good Faith - Requiring both parties to disclose all material facts.
What is the duty of disclosure under the Marine Insurance Act 1906?
The proposer must disclose all material facts, even if not asked by the insurer.
What are the consequences of non-disclosure under the Marine Insurance Act 1906?
The insurer can void the contract if material facts are not disclosed, even if the failure to disclose was innocent.
What are the key weaknesses of the Marine Insurance Act 1906?
The Act is harsh on policyholders, making it difficult for them to know what the insurer considers material, creating an imbalance in favour of insurers.
What type of contracts does the Marine Insurance Act 1906 apply too?
Marine insurance contracts only.
What type of contracts does the Consumer Insurance (Disclosure and Representations) Act 2012 apply too?
Consumer insurance contracts for personal, non-business proposers.
Why was the Consumer Insurance (Disclosure and Representations) Act 2012 introduced?
It was introduced to protect consumers and remove harsh obligations from the Marine Insurance Act 1906.
What were the key changes to the Consumer Insurance (Disclosure and Representations) Act 2012?
- The duty of disclosure was abolished for consumers.
- Consumers are only required to:
- Answer the insurers questions fully and accurately
- Take reasonable care to not make a misrepresentation.
What are the types of misrepresentations and there remedy under Consumer Insurance (Disclosure and Representations) Act 2012?
Innocent (honest mistake) - No remedy
Negligent (careless) - Proportionate remedy (reduce pay-out or increase premium)
Deliberate/reckless (intentional) - Void the contract, retain premiums.
What impact does the Consumer Insurance (Disclosure and Representations) Act 2012 have on consumers?
It provides greater protection for consumers as insurers cannot void a contract for innocent misrepresentation and the insurer must show the misrepresentation affected their decision to take the risk.
What type of contracts does the Insurance Act 2015 apply too?
Commercial insurance contracts (non-consumer)
Why was the Insurance Act 2015 introduced?
It was introduced to make the law fairer and balance the interests of insurers and policyholders.
What is the principle of fair presentation under the Insurance Act 2015?
Policyholders must disclose material circumstances in a clear and accessible manner.
Are policyholders required to volunteer facts under the Insurance Act 2015?
No, policyholders are not required to volunteer facts unless asked, but any facts provided must be complete and correct.
What is considered a material circumstance under the Insurance Act 2015?
A fact is material if it would influence a prudent insurers decision to take the risk or the terms applied.
What is the requirement for reasonable search under the Insurance Act 2015?
Policyholders must carry out a reasonable search to discover material facts.
What impact does the Insurance Act 2015 have on insurers regarding breach of warranty?
Insurers can no longer void contracts for breach of warranty unless the breach is relevant to the loss.
How does the FCA define a vulnerable customer?
“A vulnerable customer is someone who, due to their personal circumstances, is especially susceptible to harm, particularly when a firm is not acting with appropriate levels of care”
What are some examples of vulnerability according to the FCA?
Poor health
Life events (e.g. bereavement)
Poor literacy or numeracy skills
What are the FCA’s focus areas around customer vulnerability?
- Understanding Needs - firms must identify and understand the need of vulnerable customers.
- Staff Skills - staff must be trained to handle vulnerable customers.
- Firms must take steps to ensure fair treatment of vulnerable customers.
How long does the duration of fair presentation last?
The duration on fair presentation exists from the start of the quotation until the policy is bound of the quote expires.
The duty arises again if there is a change to the risk during the policy term, in the event of a claim and at renewal.
What are the two circumstances in which a breach of the duty of fair presentation arises?
- Non-Disclosure: the proposer fails to tell the insurer something they know.
- Misrepresentation: the proposer makes a statement which is false.
Both of which would have affected the insurers decision to take the risk on.
What happens if the non-disclosure of misrepresentation is fraudulent?
-The policy is voidable
-The insurer can keep the premium and sue for damages
-The insurer can ignore the breach in good faith in which case the policy continues, and the insurer would have to pay the claim.
Can you give an example of a physical hazard?
Motor insurance: age of driver, condition of vehicle.
Can you give examples of a moral hazard?
Carelessness: a drivers lack of care can increase the change of an accident and its severity.
Dishonesty: a person who has previously made fraudulent or exaggerated claims represents a greater moral hazard.
What is the most common way for insurers to obtain material information?
A proposal form.
What are ways of obtaining material information?
Proposal forms
Brokers
Risk surveys
Supplementary questionnaires
Meeting with clients
Call centres
Internet
What type of insurance can supplementary questionnaires be used for when obtaining material information?
Money, fire and public liability insurance.
What type of insurance can meeting with clients be used for when obtaining material information?
Commercial insurance.
What type of insurance can call centres be used for when obtaining material information?
Personal lines insurance.
