chapter 2 Flashcards

1
Q

what is a contract?

A

‘an agreement, enforceable by law, between two or more persons to do, or abstain from doing, some act or acts, their intention being to create legal relations and not merely to exchange
mutual promises.’

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2
Q

what are the essentials to a valid contract?

A
  • offer and acceptance
  • consideration.
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3
Q

what are the other elements to a valid contract?

A
  • Intention to create a legal agreement
  • Possibility of performance
  • Capacity to enter into legal relations
  • Consensus ad idem (literally: meeting
    of minds)
  • Legality
  • Certainty
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4
Q

what type of policy is an insurance policy?

A

simple contracts

It follows that a policy does not have to have been issued for cover to exist.

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5
Q

what is contract certainty?

A

requires all parties involved in the contract to know exactly what the terms are before inception and that some sort of evidence of the contract is issued to the insured a short time after inception

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6
Q

offer and acceptance

A

unconditional acceptance - Tom’s acceptance does not alter any of the terms of Bill’s offer. He has not tried to change any of the terms. A contract is formed, subject to the other essential elements being present. To be effective, acceptance must be the final and unqualified agreement to the offer

conditional acceptance - If new terms are introduced, the so-called acceptance becomes a new offer (a counter-offer)
which is open to be accepted or rejected by the person who made the original offer.
Not until Bill accepts Tom’s counter-offer, without further conditions, is a contract formed. A counter-offer operates as a rejection of the original offer

postal acceptance - where the parties have agreed to use the post as the method of communication, acceptance is complete at the point when the letter of acceptance is posted. This rule applies even if the letter is delayed, or is lost or destroyed in the post and never reaches the offeror,

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7
Q

consideration

A

‘some right, interest, profit or benefit
accruing to one party, or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other.’

consideration is each person’s side of the bargain which supports the contract.

The consideration from the insured is generally the payment of the premium and the consideration from the insurers is the promise to pay valid claims

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8
Q

what is insurable interest?

A

‘the legal right to insure arising out of a financial relationship recognized at law, between the insured and the subject-matter of insurance.’

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9
Q

features of insurable interest.

A
  • subject-matter
  • need for a legal relationship, but not necessarily
    ownership
  • financial value
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10
Q

what is subject matter?

A

Subject-matter of insurance:
This is what is actually being insured, be it a physical thing such as a building, a car, a ship or some livestock, or the potential to be held legally liable for loss or damage to someone else or their property.

Subject-matter of the contract:
It might be ownership of property, responsibility for the safe-keeping of goods stored in a warehouse,

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11
Q

what is legal relationship?

A

relationship of the insured with the subject-matter must be recognized in law

Merely feeling responsible for something is not adequate

it is important for insurers handling international business to appreciate that the legal position differs from country to country and what is recognized under English law may not be under another country’s law, and vice versa.

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12
Q

what is financial value?

A

that should something bad happen then the insured may have a financial
downside because something has been damaged or destroyed, or because they have incurred a legal liability which may result in an award of damages against them.

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13
Q

what are insurers own insurable interest?

A

Insurers have an insurable interest allowing them to purchase reinsurance to protect them from the risks they have written

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14
Q

timings of insurable interest - life insurance?

A

Insurable interest must exist at inception but need not exist at the time of a loss.

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15
Q

timings of insurable interest - marine insurance

A

Insurable interest must exist at the time of a loss but need not exist at inception although a reasonable expectation of acquiring one is required

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16
Q

timings of insurable interest - general insurance

A

A general rule that insurable interest must exist both at inception and at loss; however, an anticipated interest may be sufficient at inception.

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17
Q

what are the different ways insurable interest can be created?

A

common law
contract
statutes

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18
Q

what is common law?

A

We all owe duties to each other and have certain rights under common law. These give rise to insurable interests

eg. ownership or exposure to liabilities to others under the law of negligence

eg. a local council is responsible for ensuring that pavements are well maintained

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19
Q

what is a contract in the context of the creation of insurable interest?

A

There are situations when we enter into a contract in which we accept greater
responsibilities and therefore liabilities than those imposed by common law.

eg. a landlord is liable under contract to their tenant to maintain the property; however, they can enforce responsibilities onto the tenant under the same contract.

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20
Q

what is statute in the context of the creation of insurable interest?

A

There are some statutes which impose a positive duty:
- These statutes make the tenants responsible for the upkeep of the buildings they occupy.
- This gives the tenants an insurable interest in the building.

There are also statutes which restrict liability:
- Hotel Proprietors’ Act 1956 – liability only exists if a room has been booked and
damage occurred during the time the guest was entitled to use the accommodation.

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21
Q

what is good faith in pre contract negotiations?

A

means that both parties should be open and transparent with each other in the sharing of key information relating to the risk.

It is the proposer who has the duty to
disclose all material facts about the risk to the insurer.

The insurer must be entirely open with the proposer
- introduce new non-standard terms into the contract that were not discussed during negotiations or withhold the fact that discounts are available for certain measures that improve a risk.

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22
Q

Consumer Insurance (Disclosure and Representations) Act
2012

A

a duty to take reasonable care not to make a misrepresentation to their insurers,
and whether they have exercised reasonable care will be considered in light of all the relevant circumstances.

2 misrepresentations under this Act
- careless
- deliberate and reckless

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23
Q

what makes a misrepresentation deliberate or reckless?

A
  • if the consumer knew that it was untrue or misleading, or did not care whether or not it was untrue or misleading
  • knew that the matter to which the representation related was relevant to the insurer, or did not care whether or not it was relevant to the insurer.
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24
Q

If the insurer can prove deliberate or reckless…

A

their options are:
-avoidance of the contract
and refusing all claims
- not need return any premium unless it would be unfair to the consumer to retain them.

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25
Q

If the representation is merely careless…

A

insurer’s remedies depend on what they
would have done without the representation.

  • If they would not have entered into the contract on any terms, then they may avoid the contract and return the premium.
  • If they would have entered the contract but on different terms, then the contract is to be treated as if it had been entered into on those terms if the insurer so requires.
  • If the insurer would have entered into the contract but would have charged a higher
    premium, then the insurer may reduce proportionately any amounts to be paid on a claim.
26
Q

Legal position if the insured is not a consumer

A

the insured must make a fair presentation of the risk to the insurer.

27
Q

materiality

A

not new and exists in the pre-existing law on disclosure and representations

Marine Insurance Act 1906 and
states that ‘Every circumstance is material which would influence the judgment of a prudent insurer in fixing the premium or determining whether he will take the risk’.

key changes within the Insurance Act are:
- the insured cannot data dump on the insurer – the presentation must be reasonably clear and accessible
- the insurer has to consider whether the presentation invites further questions to be asked

28
Q

modification of policy wordings at inception

A

Under common law, the duty of disclosure starts when negotiations begin and ends when the contract is formed

no requirement for the insured to declare material information unless it affects the policy cover. eg. if property price increases the policy needs to accommodate a risk

a policyholder does not need to disclose a conviction for fraud (which would be a material fact for all general insurance
policies) until the following renewal

29
Q

Modification by policy wordings on renewal

A

the insured’s duty of disclosure is revived for general insurance
(non-life) policies.

All general insurance policies eg. fire, theft, liability are contracts that are renewable, usually after twelve months. When the
contract ends it is customary to offer renewal terms.

The duty of disclosure is revived during the period of negotiation and applies as for new
contracts.

30
Q

Cancellation of insurance contracts - insurers rights

A

letter sent to insured address giving 14 days cancellation notice

The period of notice is not standard, some insurers state 10 days’, others 30 days’.

If the insurer invokes this cancellation condition a pro rata return premium is sent to the insured - not common

Some policies that provide war coverage (particularly in the marine market) have
cancellation provisions which operate in two ways:
-To allow cancellation on short notice but with immediate re-activation allowing the insurers to increase the premiums if the subject-matter insured is likely to enter high risk areas
- To allow immediate cancellation of the policy if war breaks out between any two of five named countries.

31
Q

Cancellation of insurance contracts - policyholders rights

A

less common

Some insurers permit this in their wordings, allowing a return of premium.

much more common for the policyholder to have a right to cancel, but for the insurer to be entitled to charge for the cover already provided.

32
Q

what are the other means of terminating insurance contracts?

A

fulfilment

voidable contracts

33
Q

what is fulfilment?

A

This means that the contract has been fully performed

this will depend on matters such as the extent of financial coverage available under the policy.

If the policy will pay out a maximum of US $50m any one policy year and has paid out that amount in the first 6 months, then the contract has been fulfilled.

In reality the policy will remain in force, but it will not be able to respond to any more claims.

34
Q

what are voidable contracts?

A

one party to a contract may set it aside.

An example of this would be the deliberate failure to disclose material information – which
gives the insurer the right to avoid the policy.

It is a choice it must make, not an automatic cancellation.

must distinguish this type of situation from one in which the insured fails to fulfil a condition relating to a claim. In this case, the insurer may have the right to avoid
paying the particular claim, but the policy will remain in force.

35
Q

proximate cause

A

there are occasions when the cause of the loss is not so easily defined, either
because there is a chain of events or there is more than a single cause

The proximate cause of an occurrence is always the dominant cause and there is a direct link between it and the resulting loss.

A single event is not always the direct cause of a loss: a loss sometimes occurs following a train of events.

35
Q

definition of indemnity

A

‘financial compensation sufficient to place the insured in the same financial position after a loss as they enjoyed immediately before the loss occurred.’

36
Q

types of perils

A
  • Insured perils: those named in the policy as covered.
  • Excepted or excluded perils: those named in the policy as specifically not covered.
  • Uninsured or unnamed perils: those perils not mentioned at all in the policy.
37
Q

what are benefit policies?

A

These are short-term policies because the insurer has the option of inviting renewal at the
end of each period of insurance.

there is no way that a price can be placed on the loss of a limb or of sight, so the principle of indemnity cannot apply.

Insurers do try to take account of an individual’s circumstances and earnings when agreeing to insure weekly benefits for disablement. They do so because they do not wish the policy benefits to act as an incentive for the insured to remain off work longer than
necessary.

38
Q

policies that fall into the category
of benefit policies include…

A
  • personal accident
  • loss of license for air crew.
39
Q

settlement options open to an insurer
for indemnity

A
  • cash
  • repair
  • reinstatement
  • replacement
40
Q

Cash payment (indemnity)

A

most insurance claims are settled by the payment of money

particularly with commercial insurances.

However, for personal insurances (in particular, home insurance) there has been, since the
1990s, a growing trend for insurers to use the replacement option through nominated retail
chain stores.

Many insurance companies now have close relationships with retailers, and the insurer’s bulk-buying power often means they can get quite large discounts

However, the Financial Ombudsman Service (FOS) has indicated that where policyholders
do wish to have a replacement they should be allowed to choose where they purchase this and they are entitled to a cash settlement if they cannot find an acceptable alternative.

41
Q

repair (indemnity)

A

The most common example is in motor insurance claims

approved repairer will provide the insurer with
guarantees in relation to workmanship and hourly rates and the provision of courtesy
cars, in return for a flow of business from the insurer.

It is important to remember that in many commercial policies of insurance, the item is repaired.

42
Q

replacement (indemnity)

A

most common example of replacement is glass
insurance.

Speedy replacement means further losses are minimised, such as when shop front windows are smashed.

replacement is also often used as a means of settling household property
losses.

the policyholder simply orders a replacement item from one of
the household name retail stores and the item is paid for by the insurer.

43
Q

reinstatement (indemnity)

A

Reinstatement means
that the insurer agrees to restore a building (or piece of machinery) that has been damaged

this is not a popular option with insurers.

The reason for this is that, unless the
policy specifies otherwise, they are bound to reinstate the property so that it is largely in the same condition it was before the loss.

44
Q

Reinstatement memorandum clause

A

most important aspect is that
the sum insured must represent the full value at the time of reinstatement.

This means that
the insured pays a premium based on the higher amount.

allows a margin for error in estimating the sum insured.

It states that
the insured value must be at least 85% of the actual value otherwise claims payment will be
reduced.

Reinstatement must be carried out without delay, though the insured is given flexibility about where and how reinstatement takes place.

45
Q

Day One reinstatement
clause

A

requires the insured to state the reinstatement amount on the first
day of the cover.

Insurers provide an automatic uplift to allow for inflation (usually an extra 50% of the ‘declared value’) but only charge a modest increase for this inflation element
The advantage of this is that the reinstatement figure at day one is a relatively easy
figure to establish. Because of this, the day one value must be accurate. There is no 15%
margin for error as there would be with a reinstatement memorandum.

46
Q

agreed value policy

A

the value of the subject-matter of the insurance is agreed at the start of the contract and the sum insured is fixed accordingly.

This value will be reviewed at each
renewal.

In the event of a claim, the value need not be proved at the time of the loss.

47
Q

formula used to calculate a claim payment,

A

sum insured
——————- x loss
value of all
goods as risk

48
Q

excess

A

is an amount that is deducted from each claim and is paid by the insured

49
Q

deductible

A

a deductible was a large excess

This would be the case where a commercial organisation agrees to meet the cost of any claim falling within the policy terms, up to the stated value of the deductible

50
Q

franchise

A

franchise operates in the same way as an excess or deductible

it is the first amount
of any claim that the insured must pay themselves.

it differs once the claim value
exceeds the franchise value. Once this happens, the insurers will pay the whole claim with the insured not having to pay anything.

Franchises are rare in the market these days

51
Q

contribution definition

A

the right of an insurer to call upon others similarly, but not
necessarily equally, liable to the same insured to share the cost of an indemnity payment’.

52
Q

dual insurance

A

it rarely occurs in
commercial insurances due to the more sophisticated nature of the buyers and the use of brokers.

The most frequent example of double insurance is a person going on holiday and buying travel insurance not realising that their household contents insurance could well provide cover for items such as cameras and sunglasses whilst away from the property.

53
Q

Contribution condition

A

This condition restricts the insurer’s liability to its rateable proportion or rateable share of a loss.

54
Q

Rateable proportion

A

the share of any claim that an insurer pays when two or more insurers
cover the same risk; usually in proportion to the respective sums insured.

Two possible ways
of determining the rateable proportion of a claim include:

by sum insured
by independent liability

55
Q

formula for sum insured

A

policy sum
insured
———————- x loss
total sum
insured

56
Q

formula for by independant liability

A

independent liability
under this policy
———————- x loss
total of independent
liabilities under
all policies

57
Q

exceptions to the principle of contribution

A

Non-contribution clauses: This means that the policy would not contribute if there was another insurance policy in
force. This means
that each insurer would contribute only its rateable proportion.

More specific insurance clauses: Certain policies include a clause which restricts cover
in situations where a more specific insurance has been arranged. The most common
example is in a household policy. The reason for this
is that many householders arrange specific insurance for jewellery and it
is not the intention for both policies to contribute.

Market agreements: operate to smooth the path of contribution settlements.

58
Q

subrogation

A

the right of an insurer following payment of a claim, to take over the insured’s rights to recover payment from a third party responsible for
the loss.

59
Q

Tort

A

a breach of … everyone has a duty to act in a reasonable way towards others