Chapter 2 - Basic insurance legal principles and terminology Flashcards
What is an insurance contract?
An agreement enforceable by law, between an insured and insurer
What makes a valid contract?
Offer and acceptance
Consideration
Intention to create a legal agreement
Capacity to enter (>18)
Meeting of minds - do both parties believe they are agreeing to the same thing
Certainty - terms are clear
What is the legal term for an invalid contract?
Void ab initio (from the beginning)
All parties to a contract must act in?
Good faith - must not mislead one another
How is insurance cover evidenced in the London Market?
Contract certainty - all parties know terms before inception and evidence provided within 30 days
MRC - slip
Broker Insurance Document - broker creates
What is unconditional acceptance?
“I accept”
What is conditional acceptance?
“I accept as long as I can have”
What is postal acceptance?
Parties have agreed to use post
Acceptance is granted once letter of acceptance is POSTED
What is consideration?
Each person’s side of the bargain which supports the contract
Legally defined by Currie vs Misa 1875
What is the consideration from the insured?
Paying the premium
What is the consideration from the insurer?
Promise to pay valid claims
What is insurable interest?
Legal right to insure
What are the features of insurable interest?
Subject- matter
Legal relationship
Financial value
Insurer’s own insurable interest - purchase reinsurance
Timing of insurable interest
When must insurable interest exist in life insurance contracts?
Must exist at inception, not at the time of loss
When must insurable interest exist in marine insurance contracts?
Must exist at the time of loss
When must insurable interest exist in general insurance contracts?
Must exist at both inception and time of loss
How can insurable interest arise?
Common law
Contract - greater liabilities than common law
Statue - impose a positive duty e.g., Repair of Benefice Buildings Measures Act 1972 - responsible for upkeep of buildings
Statues modifying insurable interest - restrict liability e.g., Hotel’s Proprietors’ Act 1956 - hotel liability if room not booked
Does the principle of good faith apply equally to the proposer and insurer in pre-contract negotiations?
Yes
Who has the duty to disclose all material facts about the risk in pre-contract neogitations?
Proposer
What can’t the insurer do in pre-contract negotiations?
Introduce non-standard terms into the contract that were not discussed during negotiations
Withhold available discounts to improve as risk
What is a consumer?
Someone who is buying insurance for purposes unrelated to their business, trade or profession
What duty does a consumer have under the Consumer Insurance (Disclosure and Representations) Act 2012?
Take reasonable care not to make a misrepresentation to their insurers
What are two misrepresentations under the Consumer Insurance (Disclosure and Representations) Act 2012?
Careless
Deliberate or reckless
What makes misrepresentation under the Consumer Insurance (Disclosure and Representations) Act 2012 deliberate or reckless?
Knew/didn’t care it was untrue or misleading or didn’t care
Knew/didn’t care that the matter was relevant to the insurer
What can an insurer do if they can prove a deliberate or reckless consumer?
Avoidance of contract
Refuse all claims
Don’t need to return premium unless unfair to consumer to retain them
What can an insurer do if they can prove a carless consumer?
Depends on what they would have done without the representation
What can an insurer do if claims are involved with a deliberate, reckless or careless consumer?
If they wouldn’t have entered into the contract they may avoid the contract and return the premium
If they would have entered the contract but on different terms, then contract treated using the different terms
If they would have entered the contract but with a higher premium, then insurer reduces amounts to be paid on a claim
What can an insurer do if claims are not involved with a deliberate, reckless or careless consumer?
If they wouldn’t have entered into the contract they may avoid the contract and return the premium
If they would have entered the contract but on different terms, then contract treated using the different terms
Give notice and terminate the contract - insured or insurer
Premiums must be repaid
Where does it define what would be considered ‘unreasonable’ for rejecting a claim from consumers?
Insurance: Conduct of Business Requirements (ICOBS)
What act contains the law on disclosure and representations for non-consumer insureds?
Insurance Act 2015
Disclose every material circumstance which the insured knows or ought to know for the insurer to make enquiries
What concept is contained in the Marine Insurance Act 1906?
Materiality
Every circumstance is material which would influence the judgement of an insurer fixing the premium on a risk
What are two types of material information to insurers?
Physical hazard - e.g., info about the construction of a building and heating system
Moral hazard - e.g., insured has any criminal convictions, insurances previously declined
What are the key changes within the Marine Insurance Act 1906?
Cannot dump info on each other - insurer and insured
Insurer to ask relevant questions
Examples of information that do not need to be disclosed during contract negotiation?
Matters of law
Public knowledge
Factors that lessen the risk
Information waived by insurers
Information that a survey would’ve revealed
Information that an insurer does not need to know but varies depending on whether it was relevant or material
The insurer ‘ought to know’ something if…
It is known by an employee or agent or insured
The insurer is ‘presumed to know’…
Things which are common knowledge and things in their class of business
What does estoppel mean?
Legal term used for a bar that precludes a person from asserting a fact or a right
Is the notice of cancellation for insurers stand?
No
What are the two ways in which war cancellations operate?
If cancelled in short notice, immediate reactivation allowing insurers to increase premiums if insured is going to high risk waters
If war breaks out between certain countries
Do policyholders have a right to cancel?
Yes but usually at a cost for insurers processing costs
What does fulfilment mean?
Contract has fully performed e.g., all claims in claims limit have been paid out
How can a policy be voidable?
No insurable interest
What is the proximate cause?
Dominant cause when there is a chain of events that cause a loss
Direct link between cause and loss
What are the three classifications of perils when checking whether the peril is covered by the policy?
Insured perils - those named in the policy
Expected or excluded perils - in policy as specifically not covered
Uninsured or unnamed perils - not in policy at all
What happens to a claim if there is >1 peril that caused damage?
Impossible to allocate the damage to different perils so comes down to whether a peril is/isn’t included
What happens to a claim if one peril is excluded from the policy?
Nothing paid at all
What happens to a claim if one peril is not included/mentioned from a policy?
Whole claim is paid
What is the definition of indemnity?
Financial compensation sufficient to place the insured in the same financial position after a loss as they enjoyed immediately before the loss occurred
Insured is not to make a profit
What is a short-term benefit policy?
Provide fixed benefits e.g., accident and sickness
Are short-term benefit policies policies of indemnity?
No
No price on loss of sight for example so no financial compensation is enough
What are some examples of benefit policies?
Personal accident
Loss of licence for air crew
Life insurance
Pension
What are indemnity settlement options available to insurers?
Cash
Repair
Reinstatement
Replacement
When is a cash payment used as an indemnity settlement option by insurers?
Mainly for commercial insurances
e.g., business interruption, liability policies
When is repair used as an indemnity settlement option by insurers?
Motor policies
Cheaper than if insured might achieve - larger organisation
When is replacement used as an indemnity settlement option by insurers?
Glass insurance
Speedy way to reduce further losses
When is reinstatement used as an indemnity settlement option by insurers?
Restore a building that has been damaged by a peril
Limited by sum insured so not preferred - can’t get to max pay out then stop works
Is property insurance a contract of indemnity?
Yes
‘New for old’
Replacement cost minus wear and tear
Is liability insurance a contract of indemnity?
Yes
Legal liability to pay damages and legal costs
Policies detail what is included
How do marine insurers measure indemnity?
Valued policy aka agreed value policy
Insurable value is agreed between the insured and insurer
How do property insurers measure indemnity?
Based on its value at the date and place of loss
What is betterment in basic building cover?
Insurers make allowances for anything that cannot be repaired as it was before and replacement has to be new
What are reinstatement conditions in property insurance?
Full value at the time of a loss (no wear and tear deduction)
What is the reinstatement memorandum clause in property insurance?
Sum insured must represent the full value at the time of reinstatement
Insured pays a premium based on the higher amount
What is the day one reinstatement clause in property insurance?
Insured to state reinstatement amount on the first day of cover
What is the starting point for the measurement of indemnity in machinery and contents?
Basic cover - is there a ready second hand market for the item?
If there is - second hand price and cost of transportation and installation
If there isn’t - cost of repair and replacement less any wear and tear
What is a first loss policy?
Might be >1 hazard on a risk but sum insured is only for 1 hazard
If full value isn’t really a risk
What are the limiting factors of indemnity?
Sum insured - max amount to be recovered, not always stated in policies
Inner or item limits - limits within the overall sum insured, can be against different perils
Average - losses paid in proportion to what the insured has decided to set as a sum insured
Excess - amount that is deducted from each claim and paid by the insured
Deductible - large excess
Franchise - excess lifted if the claim value exceeds the franchise value - insurers pay the whole claim
What is contribution and does it support the principle of indemnity?
When an insured has more that one policy covering a particular loss or liability so insurer calls upon other insurer to share the cost of indemnity in a rateable manner
Dual insurance
Yes
How does contribution arise?
Common subject-matter
Common insurable interest
Common perils
Both policies are liable for loss
Neither policy contains a non-contribution clause
What is rateable proportion?
Share of any claim an insurer pays
How is rateable proportion calculated?
By sum insured - (policy sum / total sum) * loss
By independent liability - amount payable calculated under each policy and loss shared in proportion to independent liability (independent liability under this policy / total of independent liabilities under all policies) * loss
When is contribution modified?
Non-contribution clauses - if >1 policy has this, then cancels out and insurer would contribute its only rateable proportion
More specific insurance clauses - insuring jewellery, >1 insurer does not need to contribute
Market agreements - Association of British Insurers (ABI) - insured does not need to claim from each policy if modest
What is subrogation?
Insurers right to claim against a responsible third party having first indemnified the insured
What is tort?
Breach of duty to act in a reasonable way in common law
e.g., someone crashes into your wall
What statue makes provisions for claims that can be made against the police in relation to property damaged, stolen in riots?
Riot Compensation Act 2016
43 days to claim and pay
What is salvage?
Any residual value in the item insured after a loss
i.e., not completely destroyed, repair cost is more than value, so some value still in destroyed item
Insurer has the benefit of
When does subrogation not happen?
Insured has no rights - ‘mutual hold harmless’ - deal with their own damage, not claim against the other
Benefit polices - can keep both personal accident benefits and court award
Subrogation waiver - prevents insurer from perusing any subrogation rights
