Chapter 2: Basic Insurance Legal Principles And Terminology Flashcards
Define a contract
An agreement enforceable by law
Between 2 or more persons
To do or abstain from doing some acts.
The intention being to create a legal relationship
and not merely exchange promises.
Define an insurance contract
An agreement, enforceable by law, between and insurer and insured
8 Ingredients for a valid contract
- Offer and Acceptance
- Consideration
- Intention to create a legal agreement - the parties are acting deliberately
- Possibility of performance - it is practical and possible to do
- Capacity to enter legal relations - capacity is a legal concept of legal ability so those not under 18 or with diminished mental abilities
- Consensus ad idem - meeting of minds - both parties agreeing to the same thing
- Legality - a contract cannot be for committing an illegal offence.
- Certainty - contract terms are clear and unambiguous so all parties aware of responsibilities
What is the term for when a contract is void from the beginning? And explain why this may be the case?
Void ab initio is void from the beginning.
This happens when the contract is missing one of the 8 ingredients.
1. Offer and acceptance
2. Consideration
3. Intention to form a contract
4. Possibility of performance
5. Legal Capacity to enter legal relations
6. Consensus ad idem
7. Legality
8. Certainty
Does a policy need to be issued for insurance cover to exist?
No because insurance policies are simple contracts.
Simple contracts do not require being evidenced in writing.
Only certain circustances require documents.
Having evidence is good practice, in london markets and this is done through a concept called Contract Certainty.
All parties know the terms and have contracts issued through Market Reform Contract’s( MRC or slip) or Broker Insurance Documents (BID)
What is an unconditional acceptance?
It is when an offer is accepted and there are no changes to the terms.
To be effective, acceptance must be final and unqualified agreement to the offer.
What is conditional acceptance?
In response to an offer, if new terms are introduced, the so-called acceptance becomes a new offer( counter-offer) to which an acceptance is required from the person who made the original offer.
What is a general rule of when a contract is accepted? What is the exception?
It is when the acceptance is received by the offeror( person who makes the offer).
One exception is when it is agreed that the method of communication is by post.
Then acceptance is when the acceptance is posted.
Regardless of whether it is received by the insurer.
Define consideration (ingredient for a contract)
Each person’s side of the bargain which supports the contract.
Some benefit accruing to one party (e.g profits ) or responsibility for loss suffered being given to the other.
Define insurable interest
Legal right to insure arising out of a financial relationship recognised at law, between insured and the insurer.
It is a necessary element for a valid contract.
Need to clarify for definition:
1. Subject Matter
2. Need for legal relationship but not necessarily ownership
3. Financial value
4. Insurer’s insurable interest
5. Timing of insurable interest ( particularly anticipated insurable interest )
What is subject-matter
It is a factor to consider in a valid contract clarifying insurable interest.
There are 2 types to consider:
1. Subject-matter of Insurance - what is actually being insured physical things or liability for a loss
2. Subject-matter of the Contract - relationship the insured has with the subject-matter of insurance
What are the typical timings for 3 different types insurance contracts?
Life insurance contract:
Insurable interest at inception but not at time of loss
Marine insurance contract:
Insurable interest at time of loss but not at inception. Although reasonable expectation to acquire one.
General insurance:
General rule to exist at inception and time of loss but can have anticipated interest at inception.
What is good faith? For the insured and insurer?
Good faith is a principle that applies to both insurer and insured throughout the contract negotiations.
It means they both need to be open and transparent with each other in the sharing of key information relating to the risk.
It applies differently to both:
Insurer - declare any discounts and not introduce non-standard terms that aren’t discussed in negotiations
Insured - duty to disclose all material facts about the risks to the insurer as the nature of the subject-matter of the insurance contract and circumstance are mainly known by the insured. Eg. Disclosing all material and knowing what’s material is difficult
What is the legal position of insured if a consumer?
A consumer is when they buy insurance for themselves and not for a business, trade or profession.
Consumer responsibilities include:
Consumer Insurance (Disclosure and Representations) Act 2012 - to take reasonable care not to make misrepresentation to insurers, and if reasonable care has been exercised.
2 types of misrepresentation under Consumer’s Insurance( Disclosure and Representations) Act:
- Careless
- Deliberate or reckless
What act makes consumers responsible for reasonable care to not make misrepresentations?
Consumer Insurance ( Disclosure and Representations) Act 2012
What’s the 2 types of misrepresentation under Consumer Insurance( Disclosure and Representations) Act 2012?
- Careless
- Deliberate or Reckless - insured knows it is untrue or misleading / knew something was relevant to the matter but didn’t include
What can an insurer do if deliberate or reckless?
- Avoid contract and refuse all claims
- Need not return any premium unless unfair to consumer to retain them
What can insurer do if deliberate or reckless?
- Avoid contract and refuse all claims
- Need not return any premium unless unfair to consumer to retain them
What can insurer do if careless?
No claims:
1. Depends on what they would have done without the representation
- If wouldn’t have entered the contract then can avoid contract and return premium
- If would have entered contract on different terms (not including those relating to premium) the contract treated as if entered on those terms.
- Insurer gives notice of either termination or contract variations
- Premiums repaid for the balance of the contractual term
- Any claims during notice period will be handled the usual way
Claims:
1. If wouldn’t have entered the contract then can avoid contract and return premium
- If would have entered contract on different terms (not including those relating to premium) the contract treated as if entered on those terms.
- If insurer would’ve charged higher premiums then insurer can proportionately reduce claims payment.
When can an insurer not decline a claim payment? What is the Claims handling section of the
In Insurance:Conduct Of Business (ICOBS), the general rule is insurers must not unreasonably reject a claim from “consumers” (Unless there is fraud) like:
1. Non-disclosure of a fact material to risk which policyholder could not have reasonably expected to have disclosed
2. Non-negligent misrepresentation of a fact material to the risk
What is the legal position if not a consumer? What is the law called for non-consumer insureds?
Insurance Act 2015 - disclosure and representation for non-consumer insureds.
Must make a fair representation which is when it gives a prudent insurer sufficient information to notice if it needs to make further enquiries.
What is a fair representation?
A fair representation is when it gives a prudent insurer sufficient information to notice if it needs to make further enquiries.
What is Materiality? What is the act related to this?
Materiality is when it would influence the judgement of a prudent insurer in fixing premium or determining whether they will take the risk.
The act is called Marine Insurance Act 1906.
What are the 2 types of material information? Key changes in Insurance Act 2015?
- Physical Hazard - informationa about building construction
- Moral Hazard - if proposer has any criminal convictions, any insurance declined previously or any fraudulent claims
Key changes include:
- No data dump
- Insurer has to decide if presentation of data invites further questions and insurer’s responsibility
- Sets out scope foe insured’s actual and imputed knowledge. It includes all information known in a company including brokers except for any confidential information held by the broker. Insured “ought to know”’ includes a “ reasonable search of information available”
