Chapter 2 - Basic Insurance legal principles and terminology Flashcards
Contract Law
A law of deals or agreements
“An agreement enforceable by law between two or more persons to do, or abstain from doing, some acts, their intention being to create legal relations and not merely to exchange mutual promises.”
An agreement between insured and insurer
Main purpose of insurance
Pay claims to policyholders should they suffer loss or damage
Restores the insured to the position they were in before the loss (indemnifying the insured)
What are the two most important essentials of a valid contract?
- Offer and acceptance
- Consideration
Name three of the six other important elements of a valid contract
- Intention to create a legal agreement
- Possibility of performance
- Capacity to enter into legal relations
- Consensus ad idum (meeting of minds)
- Legality
- Certainty
Legal term for a contract which may be declared invalid if missing essentials of a valid contract
Void ab initio
From the beginning
Simple contract
Insurance policies are simple contracts
A simple contract does not need to be evidenced in writing
A policy does not have to have been issued for cover to exist
Good practice to have evidence of the agreement - in London Market called Contract Certainty
Contract Certainty in LM
Requires all parties to know terms
Evidence in form of a slip (Market Reform Contract) or Broker Insurance Document
When does a contract come into existence?
When one party makes and offer, and the other accepts unconditionally
Unconditional acceptance
Accepting an offer without altering any of the terms.
Must be the final and unqualified agreement to the offer
Conditional acceptance
Introducing new terms (a counter-offer)
Postal acceptance
Acceptance complete when the letter of acceptance is posted
Consideration
Each persons side of the bargain which supports the contract
Consideration from the insured = Payment of premium
Consideration from the insurer = Promise to pay valid claims
Insurable interest
“The legal right to insure arising out of a financial relationship recognised at law, between the insured and the subject-matter of insurance.”
What are the 3 features of insurable interest?
- Subject-matter
- Need for a legal relationship
- Financial value
What might an insurer do about their own insurable interest?
Purchase reinsurance to protect them from the risks they have written
When must insurable interest exist for the following:
Life assurance
Marine
General insurance
Life assurance - Inception, but not at time of loss
Marine - Time of loss, not necessary at inception
General insurance - Inception & time of loss
Insurable interest in Common Law
We have a duty of care
Law of negligence
Insurable interest such as ownership/exposure to liabilities to others.
Insurable interest- Statutes that impose a positive duty
- Settled Land Act 1925
- Repair of Benefice Buildings Measure Act 2972 (makes tenants responsible for upkeep)
Statutes modifying insurable interest
- Carriage of Goods by Sea 1971: limits liability of a carrier
- Hotel Proprietor’s Act 1956: liability only if a room has been damaged by a guest
- Carrier’s Act 1830: no liability for goods such as jewellery worth more than £10 unless value declared
Good Faith
All parties to a contract must act with good faith - they must not mislead one another.
Good faith in pre-contract negotiations
Both parties should be open and transparent
Share key information
Proposer has duty to disclose all material facts
Insurer must be open and cannot introduce new non standard terms or withhold discounts for improving a risk
What is a consumer?
Someone who is buying insurance wholly or mainly for purposes unrelated to their business trade or profession
Consumer Insurance (Disclosure and Representation) Act 2012
The consumer has a duty to take reasonable care not to make a misrepresentation to their insurers and need to exercise reasonable care
Two types of misrepresentation
Careless
Deliberate/reckless
Misrepresentation is deliberate/reckless if…
The consumer knew it was untrue or misleading or did not care
The consumer knew it was relevant to the insurer or did not care
Insurers remedies for misrepresentation when deliberate/reckless
- Avoidance of contract
- refusing all claims
- no return of premium unless it would be unfair
Insurers remedies for misrepresentation when careless and claims involved
If would not have insured - avoid contract and return premium
If would have insured but on diff terms - treated as if taken out on those terms
If would have insured at higher premium - reduce proportionately amounts to be paid on claim
Insurers remedies for misrepresentation when no claims involved
If would not have insured - avoid contract and return premium
If would have insured but on diff terms - treated as if taken out on those terms
Insurer can terminate or change terms (with notice given)
Insured can terminate
ICOBS - claims handling section
Insurers must not unreasonably reject a claim. Unless evidence of fraud.
Unreasonable grounds:
Non-disclosure of a material fact which p/h could not reasonably be expected to have disclosed
Non-negligent misrepresentation of a material fact
Insurance Act 2015
Legal position of the insured is not a consumer
The insured must make a fair presentation of the risk to the insurer
Materiality - Marine Insurance Act 1906
“Every circumstance is material which would influence the judgement of a prudent insurer in fixing the premium or determining if he will take the risk”
Two types of material fact
Physical - construction of building
Moral - criminal convictions
New rules in the insurance act for materiality
The insured can’t data dump
Insurer has to consider whether presentation invites further questions to be asked
Section 3 of the insurance Act states the insured doesn’t need to disclose circumstances if…
- it lessens the risk
- the insurer knows it
- the insurer ought to know it
- the insurer is presumed to know it
- it is something as to which the insurer waives information
Contracting out
Parties agree the provisions of the Insurance Act 2015 will not apply, and previous law on disclosures will apply.
Why is the Road Traffic Act 1988 in place?
To make sure innocent victims of road accidents are adequately compensated
When does duty of disclosure start and end?
Starts when negotiations begin and ends at inception, until renewal.
Limitation of an insurers right to information
If a Q is asked but only partial info provided and insurer doesn’t seek further details they waive their rights to the information
Estoppel
A bar or impediment that precludes a person from asserting a fact or a right.
- Insurer has to be careful not to give false sense of security on policy validity
- Insurer would be estopped from avoiding the policy because they didn’t mention they were looking into a non-disclosure
Fulfilment
Contract has been fully performed - max claim paid out. Policy remains in force but will not respond to any more claims.
Proximate cause
The active efficient cause that sets in motion a train of events
3 types of Perils
Insured perils - named in policy
Excepted or excluded perils - specifically not covered
Uninsured or unnamed perils - not mentioned in policy
If a number of perils cause damage
If one of the perils excluded - nothing paid
If one of the perils not mentioned - whole claim paid
Indemnity
Financial compensation sufficient to place the insured in the same financial position after a loss as they enjoyed immediately before the loss occurred
Benefit policies
- Personal accident
- Loss of licence for air crew
Fixed benefits, for accident and sickness.
Methods of indemnity payment
Cash
Repair
Reinstatement (restore a building)
Replacement
Measure for indemnity in property
value at date and place of loss
Betterment
Anything that cannot be repaired exactly and needs to be replaced with something new
Reinstatement memorandum
The sum insured must represent the full value at the time of reinstatement. Insured pays premium based on higher amount.
Allows margin for error estimating the sum insured
Day One reinstatement
Requires the insured to state reinstatement amount on first day of cover.
Uplift to allow for inflation.
Must be accurate no room for error
Machinery and contents
If Second hand market - second hand price plus costs of transportation and installation
If no Second hand market - cost of repair or replacement less allowance for wear and tear
Cover on a reinstatement basis
Stock - two types
Manufacturers stock in trade - raw materials, work in progress, finished stock.
Indemnity = cost of raw materials at time of loss plus labour and any other costs incurred
Wholesalers stock in trade - indemnity = cost of replacing stock at time of loss including costs of transport and handling costs
Household goods
Basic cover
New for old cover
Farming stock
Local market price is basis of indemnity
Agreed value policies
Subject-matter is agreed at start of contract, sum insured fixed accordingly
Common in marine insurance
First Loss policies
Insured believes full value of property is not at risk eg. Factory spread over large area of land. Requests a sum insured for some perils less than full value
Indemnity - limiting factors
Sum insured
Inner limits/ item limits
(Inner limits within the sum insured
Single item limits)
Average
Formula used to calculate claim payment, subject to pro rata condition of average:
SI / value of goods at risk x loss
Excess
Deductible
Franchise
Excess - amount deducted from each claim and paid by the insured
Deductible - amount deducted from limits
Franchise - first amount of any claim that must be paid by the insured
Contribution
The right of an insurer to call upon others similarly but not equally liable to the same insured to share cost of an indemnity payment
Supports the principle of indemnity
Insurers apply contribution condition otherwise insured can claim whole claim amount from that one insurer
At common law these 5 requirements must be met before contribution.
- Common subject-matter
- Common insurable interest
- Must be insured against common perils
- Both policies are liable for the loss
- Neither policy contains a non-contribution clause
Methods of applying contribution
Insurers contribute to a claim on the basis of a rateable proportion. This can be determined by:
By sum insured
Policy SI / Total SI x loss
By independent liability
Independent liability under this policy / total of independent liabilities under all policies x loss
Subrogation
The right of an insurer following payment of a claim to take over the insured rights to recover payment from a third party responsible for the loss
Tort
A breach of the duty to act in a reasonable way towards others, meaning someone is entitled to compensation in tort
Statute - The Riot Compensation Act 2016
Makes provisions for types of claims that can be made against the police in relation to property damages destroyed or stolen in the course of riots
Salvage
Not completely destroyed but so badly damaged repair costs will exceed the SI. There may be some residual value, this is salvage. Insurer entitled to salvage if it meets the loss in full.
Market agreements
Exist to reduce correspondence and admin costs in pursuing frequent subrogation procedures. Eg, the Immobile Property Agreement
Insurers barred from exercising subrogation rights when…
Benefit policy
Insurer has no rights
Subrogation waiver
Negligent fellow employees
