Chapter 10 - Policy Wording and Renewals

Question 1

Policy Wordings

Answer 1

Basic structure of all general insurance policies contain:
• Heading
• Recital clause. Will set out the constituent elements that together make up the contract.
• Signature
• Operative clause. Describes the scope of cover in detail. Each clause begins with such words as ‘The Company will…’
• Exclusions
• Conditions
• Policy schedule
• Information and facilities

Question 2

Policy Schedule

Answer 2

• Insured’s name and address
• Policy period
• Premium
• Details of the subject matter
• Sum insured or limit of liability
• Territorial limits
• Policy number
• Reference to special exclusions, conditions or aspects of cover
• Operative sections of the policy

Question 3

Common Conditions

Answer 3

• Duties of the policyholder/insured
• Alteration
• Action by the insured in the event of a claim
• Fraud
• Reasonable precautions
• Contributions
• Average
• Subrogation
• Arbitration
• Cancellation

Question 4

Use of Exclusions and Conditions

Answer 4

• Insurers could rely upon implied conditions, they feel it is more helpful to express these to make the position clear for the insured.
• Market exclusions relate to those situations where the insurer does not want to become involved because of the catastrophic nature of any potential damage
• Many specific exclusions relate to specific situations where the insurer expects some other kind of insurance to be in place
• Conditions that apply specifically to claims situations are only used by the insurers to determine the outcome of a particular claim
• Many conditions are included to emphasise the fact that the loss or damage must be fortuitous

Question 5

Information and Facilities

Answer 5

Increasingly common for policies to provide information on a number of topics, particularly where booklet policies have been developed. They may include:
• Definitions
• Customer service standards statement
• Complaints procedure
• Claims information
• Privacy notice

Question 6

Excesses

Answer 6

Is the first amount of each and every claim for which the insured is responsible. Can be either compulsory or voluntary.
Deductible is the name given to a very large excess.

Question 7

Franchises

Answer 7

Franchise is a fixed amount or period that acts as a threshold to determine whether claims are payable. Once the amount has been exceeded that claim is payable in full.
Monetary franchises are not in common use, but time franchises are found in engineering business interruption and sickness cover.

Question 8

Warranties

Answer 8

There may be important aspects of the risk that are only acceptable to the insurer if they remain as stated.
Warranties are imposed to ensure that some aspects of good housekeeping or good management is observed or to ensure that certain features of higher hazard are not introduced without the insurer’s knowledge.
A warranty is a promise made by the insured relating to facts or performance concerning the risk.

Question 9

Breach of Warranty

Answer 9

Traditionally a breach in warranty resulted in the automatic discharge of the insurer’s liability.
Under the IA 2015:
• Basis of contract clauses are prohibited
• An insured’s breach of warranty merely suspends the insurers liability
• An insurer may not rely on a breach of warranty where the warranty relates to a risk that is irrelevant to the type of loss which actually occured
• Warranties are written into the policy

Question 10

Express Warranties

Answer 10

Warranties are always express in general insurance.

Non-compliance with an express warranty may be excused if they have prior notification and an AP is paid.

Question 11

Implied Warranties

Answer 11

A warranty that doesn’t appear in the policy but which is understood by both parties.
Only found in marine insurance with the only example being that the vessel insured in seaworthy.

Question 12

Conditions Precedent to the Contract

Answer 12

If such conditions are not complied with there is doubt as to the validity of the entire contract.
Matters that will render a policy void and treated as no effect:
• No insurable interest
• A fundamental mistake
• An illegal contract
Other conditions like deliberate mis-statement entitles the insurer to avoid the policy.

Question 13

Continuing Conditions Precedent

Answer 13

There is an ongoing requirement throughout the policy period to comply.
The options for an insurer are to either avoid the policy from the date of the breach or to waive its rights and leave the whole contract in force.

Question 14

Conditions Precedent to Liability

Answer 14

These are conditions that must be complied with if there is to be a valid claim. Generally listed in a policy as the claims conditions. Insurers may avoid liability for a particular loss, but they may not repudiate the contract as a whole.
The word term is widely accepted to mean that it applies to both warranties to both warranties and conditions precedent.
When a term is breached it must be related to the loss that occurred for the insurer to rely upon it.
Where an insurance contract includes a term that will reduce the risk of loss then breach of that term does not allow the insurer to avoid liability if the breach has not increased the risk of loss that actually occurred.
An insurer can deny liability if there is a breach of a term that defines a risk as a whole. The Law commission suggests that these terms may be considered to define the risk as a whole:
• Define a geographical area in which a loss must occur for liability to attach
• Define the age, identity, qualification or experience of the operator of a vehicle, aircraft or vessel
• Exclude loss that occurs while a vehicle, aircraft or vessel is used for a commercial purpose

Question 15

Exclusions

Answer 15

Do not give the insurer any right to avoid the policy as a whole. They are aspects of the policy wording that are checked by the insurers each time a loss occurs in order to establish whether there is liability under the policy,

Question 16

Representations and Consumers

Answer 16

Insurers cannot turn down claims from private individuals where there has been innocent misrepresentation.
CIDRA also provides a number of remedies an insurer can employ where the misrepresentation involves material information.

Question 17

Representations and Non-Consumers

Answer 17

Insurers also have a number of remedies under IA 2015 in respect of misrepresentation.

Question 18

Renewal Procedure

Answer 18

Insurers are keen to encourage renewals as:
• The costs associated with renewing a policy are much less than acquiring new business
• The more stable the database of existing clients, the more reliable is the statistical information about the whole portfolio
The insurer will issue a renewal notice well before the current contract expires. The renewal notice shows any proposed changes in terms, premium and previous year’s premium.
Renewals between 1 and 3 years the rules require firms to provide customers with:
• Renewal premium and premium from previous year
• Calculation of the annual premium as appropriate following the most recent MTA excluding any fees or charges
• A statement that the customer should check the cover is appropriate
• A statement that they are able to compare prices and level of cover offered by alternative providers
Renewals after 4 or more years rules require all the information for 1 to 3 years and the firm must state:
• You have been with us for a number of years. You may be able to get insurance cover you want at a better price if you shop around.
• This must be communicated clearly and accurately, in a durable medium and in a way which draws the consumer’s attention to it as key information.

Question 19

Dual Pricing

Answer 19

By drawing consumers’ attention to what happens to their premiums at renewal the FCA hopes that this might promote competition and ultimately help to wean insurance brands off dual pricing. This is where new customers get the best prices and loyal customers pay more.
Insurers will be required to offer renewing customers a price that is no higher than they would pay as a new customer.
FCA is bringing new rules to:
• Give most consumers easier methods of cancelling automatic renewing policies
• Require insurance firms to do more to consider how they offer fair value to their customers
• Require home and motor insurance firms to report data to the FCA so that it can supervise the market more effectively

Question 20

Motor Insurance Renewal Procedures

Answer 20

Renewal procedures in motor insurance differ from other classes of insurance in view of the compulsory nature of insurance and the need to issue a certificate of insurance.
As a matter of practical convenience the renewal notice, receipt and certificate are prepared in advance of the renewal date. No days of grace are permitted because if payment is received after the renewal date and the annual certificate sent to the insurer, this would amount to backdating cover and would contravene the Road Traffic Act.