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LM1 DB > Chapter 2 - Basic insurance legal principles and terminology > Flashcards

Chapter 2 - Basic insurance legal principles and terminology Flashcards

1
Q

What is an insurance contract?

A

An agreement enforceable by law, between an insured and insurer

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2
Q

What makes a valid contract?

A

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

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3
Q

What is the legal term for an invalid contract?

A

Void ab initio (from the beginning)

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4
Q

All parties to a contract must act in?

A

Good faith - must not mislead one another

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5
Q

How is insurance cover evidenced in the London Market?

A

Contract certainty - all parties know terms before inception and evidence provided within 30 days

MRC - slip

Broker Insurance Document - broker creates

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6
Q

What is unconditional acceptance?

A

“I accept”

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7
Q

What is conditional acceptance?

A

“I accept as long as I can have”

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8
Q

What is postal acceptance?

A

Parties have agreed to use post

Acceptance is granted once letter of acceptance is POSTED

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9
Q

What is consideration?

A

Each person’s side of the bargain which supports the contract

Legally defined by Currie vs Misa 1875

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10
Q

What is the consideration from the insured?

A

Paying the premium

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11
Q

What is the consideration from the insurer?

A

Promise to pay valid claims

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12
Q

What is insurable interest?

A

Legal right to insure

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13
Q

What are the features of insurable interest?

A

Subject- matter

Legal relationship

Financial value

Insurer’s own insurable interest - purchase reinsurance

Timing of insurable interest

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14
Q

When must insurable interest exist in life insurance contracts?

A

Must exist at inception, not at the time of loss

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15
Q

When must insurable interest exist in marine insurance contracts?

A

Must exist at the time of loss

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16
Q

When must insurable interest exist in general insurance contracts?

A

Must exist at both inception and time of loss

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17
Q

How can insurable interest arise?

A

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

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18
Q

Does the principle of good faith apply equally to the proposer and insurer in pre-contract negotiations?

A

Yes

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19
Q

Who has the duty to disclose all material facts about the risk in pre-contract neogitations?

A

Proposer

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20
Q

What can’t the insurer do in pre-contract negotiations?

A

Introduce non-standard terms into the contract that were not discussed during negotiations

Withhold available discounts to improve as risk

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21
Q

What is a consumer?

A

Someone who is buying insurance for purposes unrelated to their business, trade or profession

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22
Q

What duty does a consumer have under the Consumer Insurance (Disclosure and Representations) Act 2012?

A

Take reasonable care not to make a misrepresentation to their insurers

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23
Q

What are two misrepresentations under the Consumer Insurance (Disclosure and Representations) Act 2012?

A

Careless

Deliberate or reckless

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24
Q

What makes misrepresentation under the Consumer Insurance (Disclosure and Representations) Act 2012 deliberate or reckless?

A

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

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25
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
26
What can an insurer do if they can prove a carless consumer?
Depends on what they would have done without the representation
27
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
28
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
29
Where does it define what would be considered 'unreasonable' for rejecting a claim from consumers?
Insurance: Conduct of Business Requirements (ICOBS)
30
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
31
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
32
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
33
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
34
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
35
The insurer 'ought to know' something if...
It is known by an employee or agent or insured
36
The insurer is 'presumed to know'...
Things which are common knowledge and things in their class of business
37
What does estoppel mean?
Legal term used for a bar that precludes a person from asserting a fact or a right
38
Is the notice of cancellation for insurers stand?
No
39
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
40
Do policyholders have a right to cancel?
Yes but usually at a cost for insurers processing costs
41
What does fulfilment mean?
Contract has fully performed e.g., all claims in claims limit have been paid out
42
How can a policy be voidable?
No insurable interest
43
What is the proximate cause?
Dominant cause when there is a chain of events that cause a loss Direct link between cause and loss
44
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
45
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
46
What happens to a claim if one peril is excluded from the policy?
Nothing paid at all
47
What happens to a claim if one peril is not included/mentioned from a policy?
Whole claim is paid
48
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
49
What is a short-term benefit policy?
Provide fixed benefits e.g., accident and sickness
50
Are short-term benefit policies policies of indemnity?
No No price on loss of sight for example so no financial compensation is enough
51
What are some examples of benefit policies?
Personal accident Loss of licence for air crew Life insurance Pension
52
What are indemnity settlement options available to insurers?
Cash Repair Reinstatement Replacement
53
When is a cash payment used as an indemnity settlement option by insurers?
Mainly for commercial insurances e.g., business interruption, liability policies
54
When is repair used as an indemnity settlement option by insurers?
Motor policies Cheaper than if insured might achieve - larger organisation
55
When is replacement used as an indemnity settlement option by insurers?
Glass insurance Speedy way to reduce further losses
56
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
57
Is property insurance a contract of indemnity?
Yes 'New for old' Replacement cost minus wear and tear
58
Is liability insurance a contract of indemnity?
Yes Legal liability to pay damages and legal costs Policies detail what is included
59
How do marine insurers measure indemnity?
Valued policy aka agreed value policy Insurable value is agreed between the insured and insurer
60
How do property insurers measure indemnity?
Based on its value at the date and place of loss
61
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
61
What are reinstatement conditions in property insurance?
Full value at the time of a loss (no wear and tear deduction)
62
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
63
What is the day one reinstatement clause in property insurance?
Insured to state reinstatement amount on the first day of cover
64
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
65
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
66
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
67
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
68
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
69
What is rateable proportion?
Share of any claim an insurer pays
70
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
71
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
72
What is subrogation?
Insurers right to claim against a responsible third party having first indemnified the insured
73
What is tort?
Breach of duty to act in a reasonable way in common law e.g., someone crashes into your wall
74
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
75
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
76
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

LM1 DB (7 decks)

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