Chapter 2 - Basic Insurance Legal Principles and Terminology Flashcards
What is contract law?
Agreement, enforceable by law, between insured and insurer
Insured agrees to pay premium to insurer and abide by t&c’s, in return insurer pays to the insured a sum of money on the happening of a specific event
What is the main purpose of insurance?
Restore insured to the position they were in before the loss
What are the two most important features of a valid contract?
- offer and acceptance
- consideration
Name six of the less (but still) important features of a valid contract
- intention to create a legal agreement
- possibility of performance
- capacity to enter into legal relations
- consensus ad idem
- legality
- certainty
Define void ab initio
Contract is void from the beginning
What is good faith?
Neither party can deliberately mislead the other
What is unconditional acceptance?
Acceptance of a contract with no changes to any of the terms
What is conditional acceptance?
Accepting in the form of a counter offer - adding/changing original terms
This then needs to be accepted by original offerer
Describe postal acceptance
Where parties have agreed to use post as method of communication, acceptance complete at the time of posting
This applies even if letter is delayed, lost, or destroyed.
What is consideration?
some right, interest, profit, or benefit accruing to one party, or some forbearance, detriment, loss, or responsibility given, suffered, or undertaken by the other
i.e, each persons side of the bargain which supports the contract
insured consideration = paying the premium
insurer consideration = paying any valid claims
What is insurable interest?
the legal right to insure arising out of a financial relationship recognised at law, between the insured and the subject matter of the insurance
What are the three features of insurable interest?
- subject matter
- legal relationship
- financial value
How is insurable interest created in common law?
- owe duties to each other and have certain rights in common law
- ownership or exposure to liabilities to others under law of negligence
How is insurable interest created through contracts?
- enter into a contract where we accept greater responsibilities and therefore liabilities than in common law
- e.g insurer taking on insured, now has insurable interest so can buy reinsurance
Which statutes impose positive duty?
- settled land act 1995
- repair of benefice buildings measure act 1972
these make tenants responsible for upkeep of buildings they occupy therefore have insurable interest in the building
Which statutes modify insurable interest?
- carriage of goods by sea act 1971 limits liability of a carrier to a specific amount
- hotel proprietors act 1956 liability only exists if room has been booked and damaged during the time the guest was entitled to use the room
- carriers act 1830 makes no liability for goods such as gold, silver etc worth more than £10 unless declared when put into carriers care
Describe good faith in pre-contract negotiations
- both parties should be open and transparent during negotiations
- share key information relating to risk
- proposer must disclose all material facts
- insurer can not introduce new non-standard terms not discussed during negotiations
What are the two types of misrepresentation in Consumer Insurance (Disclosure and Representations) Act 2012?
- careless
- deliberate or reckless
When is misrepresentation deliberate / reckless?
- if consumer knew it was untrue or misleading
- knew that the matter to which the representation was relevant to the insurer
What if insurer can prove deliberate or reckless?
- avoid contract and refuse all claims
- not return premium unless unfair to the consumer to retain them
If misrepresentation only careless, if claims involved what are the insurers courses of action?
- if insurers would not have entered into contract avoid and return premium
- if would have entered but on different terms, treat contract as though they were entered on those terms
- if insurer would have entered but on higher premium, reduce amounts proportionally to be paid for claims
If misrepresentation only careless, if no claims involved what are the insurers courses of action?
- if insurers would not have entered into contract avoid and return premium
- if would have entered but on different terms, treat contract as though they were entered on those terms
- give notice to insured of termination of contract or variation of terms
- give notice to terminate, premiums must be repaid for balance of term and claims arising in notice period treated in usual way
What do Insurance: Conduct of Business Requirements (ICOBS) say is unreasonable grounds for rejecting a claim?
- non-disclosure of fact material to the risk which the policyholder could not have been reasonably expected to have disclosed
- non-negligent misrepresentation of a fact material to a risk
How does the Insurance Act 2015 define fair representation?
disclosure of every material circumstance which the insured knows or ought to know, or sufficient information to put a prudent insurer on notice that further enquiry is necessary
How does Marine Insurance Act 1906 describe materiality?
every circumstance is material which would influence the judgement of a prudent insurer in fixing the premium or determining whether they will take the risk
What is material information?
- physical hazard
- moral hazard
What does an insurer ought to know?
Something known by an employee of insurer or agent of the insurer, and the information ought reasonably to have been passed onto who is making decision about risk
Information held somewhere within the organisation where the person making a decision on a risk has access to
What is an insurer presumed to know?
Information which is common knowledge and things which an insurer operating in this class of business is reasonably expected to know
What is contracting out?
Parties can agree Insurance Act 2015 does not apply but insurer must make very clear the impact of doing this
If broker is involved they have duty of presenting disadvantages of this choice
What does the Road Traffic Act 1988 say?
Prohibits insurer from avoiding liability on the grounds of certain breaches of good faith
Insurer would pay any personal injury or property claims then have right of recovery against insured
What is the insurer’s duty of good faith?
Explain different products available, and insurers ability to reduce premium for implementing risk management mechanisms
When are the times policy wordings can be modified?
- at inception
- on renewal
- continuing requirement
- on material alteration
What limitations are there to insurer’s right to information?
If question asked but only partially answered, if the insurer does not pursue then waived right to that information
What is estoppel?
If insurer invokes seven-day cancellation policy, they have waived their rights and been estopped from avoiding the contract on grounds of non-disclosure because they have acknowledged the contract
What are the insurer’s rights to cancel a policy?
Normally cancellation condition within t&c’s, if pro rata then proportional amount of premium repaid
Some contracts have war policies built in
What are policyholder’s rights to cancel?
Not common but do exist even with pro rata return of premium
What are other means of terminating contracts?
- fulfilment (end of contract)
- voidable contracts
What is proximate cause?
The dominant cause of an occurrence and there is a direct link between it and the resulting loss (first domino falling essentially)
What are the three natures of perils?
- insured perils (specifically in the contract)
- excepted or excluded perils (specifically not covered)
- uninsured or unnamed perils (no mention in the policy)
How do insurers decide if multiple perils?
- if all insured perils, loss is covered
- if any excluded, loss is not covered
- if one of perils not mentioned, loss is coverd
What is indemnity?
Financial compensation sufficient to place the insured in the same financial position as they were before the loss
What are benefit policies?
Those that provide fixed short-term benefits, usually for sickness or accident
What options are available to insurers for indemnity?
- cash
- repair
- replacement
- reinstatement
What is betterment?
In property insurance where anything can not be repaired to exactly the same standard and has to be replaced new
What is reinstatement memorandum?
Sum insured must represent full value at time of loss - allows 15% margin of error
What is day one reinstatement?
Requires insured to state reinstatement amount on first day of cover
What are the two types of stock?
- manufacturers stock in trade (raw materials, work in progress and finished stock)
- wholesalers and retailers stock in trade (indemnity is cost of replacing stock including transport / handling)
What is the indemnity for farming stock?
Local market prices
What is an agreed value policy?
Policy where sum insured agreed at start of policy so no need for proof of value if loss - common in marine insurance
What is a first loss policy?
Where policyholder believes not full value of insured property is at risk, so ask for sum insured to be less than the full value
What are limiting factors to the indemnity?
- sum insured < full value
- inner / item limits, e.g. houshold insurance where one item (gold, silver etc) is not more than 5% of total sum insured
- average for underinsurance:
(sums insured / value of goods at risk) * (loss)
What is an excess, deductible, and franchise?
Excess is amount deducted from each claim and is paid by insured
Deductible is an excess that is taken from the policy limits
Franchise is an excess until limit reached, then claim treated as no excess ever existed
What is 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 an indemnity payment
Basically one insurer pays the claim and asks for proportions back from insurers on same policy
What are the rules for contribution to arise?
- common subject-matter of insurance
- common insurable interest
- must be insured against common perils
- both policies are liable for the loss
- neither policy contains a non-contribution clause
How do you apply contribution in rateable proportion?
- by sum insured
(policy sum insured / total sum insured) * loss - by independent liability
(independent liability under policy / total independent liability under all policies) * loss
What is subrogation?
Right of an insurer following payment of a claim to take over insured’s rights to recover payment from a third party responsible for the loss
What rights say insurer can subrogate?
- tort (everyone has common duty to act responsibly towards each other, entitled to compensation if not)
- statute like Riot Compensation Act 2016
Other than subrogation, how can insurers recoup some of their outlay?
Salvage by selling some items with residual value
When does insurer not have subrogation rights?
- insured has no rights
- benefit policies
- subrogation waivers
- negligent fellow employees
