CHAPTER 2: Basic Insurance Legal Principles and Terminology Flashcards
What is contract law?
The English Law of contract is essentially a law of deals or agreements.
A contract enforceable by law between two or more persons, to do or not do something with legal intentions.
What are the essentials of a valid contract? What are the three most important?
Three most important: - Offer - Acceptance - Consideration Other essentials: - Intention to create a legal agreement - Possibility of performance (actually able to do what it says) - Capacity to enter into legal relations - Consensus ad idem (meeting of minds) - Legality - Certainty (clear and unambiguous)
What is Consensus ad idem?
Meeting of minds, meaning both parties are agreeing to the same thing.
What is capacity to enter into legal relations?
Capacity is a legal term meaning they must have the legal ability to make decision, meaning they must be of age and be sound of mind.
What happens if a contract is missing the essentials?
The contract is considered “Void ab initio”, meaning void from the beginning.
What type of contract is an insurance contract?
A simple contract, a contract made verbally or in writing but not under seal.
When does a contract come into existence?
When one party makes an offer which the other accepts unconditionally.
What is unconditional acceptance?
A response to the offer that accepts the terms, and does not try to change any of them.
What is conditional acceptance?
A response to an offer that gives new terms to be accepted by the person who gave the original offer.
What is Postal acceptance?
A response sent by post, if this method is agreed by both parties. Acceptance is complete at the point when the letter is posted, regardless of whether is actually reaches the offeror (due to delays/destruction).
What is consideration in regards to a contract?
Each person’s side of the bargain that supports the contract. For the insured this is the payment of premium, for the insurer it is the promise to pay valid claims.
What is Insurable Interest? What are the 3 features?
The legal right to insure arising out of a financial relationship recognised at law. The 3 features:
- Subject-matter (of insurance and of the contract)
- Legal Relationship
- Financial Value
What is meant by Subject-Matter wrt Insurable Interest?
2 aspects:
- Subject-Matter of Insurance (what is being insured)
- Subject-Matter of the Contract (the relationship of the insured and the subject matter of insurance)
What is meant by Legal Relationship wrt Insurable Interest?
The relationship must be recognised at law (under the countries law the contract is subject to)
What is meant by Financial Value wrt Insurable Interest?
There must be some financial downside or the action incurs awards/compensation against them.
What is the Timing of Insurance for Life Assurance; Marine insurance and General Insurance Contracts?
Life Assurance - Must have insurable interest as inception but not needed at time of a loss
Marine Insurance - Must have insurable interest at time of loss but not at inception, although must have a reasonable expectation of acquiring one.
General Insurance - Must exist at inception and at loss although an anticipated interest may be sufficient at inception.
How can Insurable Interest be created?
- Common Law - Laws that result in owing duty to others, such as the law of negligence
- Contract - extra responsibilities or liabilities can be imposed by a contract
- Statute -
Some Statutes impose a POSITIVE DUTY such as the Settled Land Act 1925 and Repair of Benefice Buildings Measure Act 1972, which make tenants responsible for the upkeep of buildings they occupy, so they have an insurable interest in the building.
Some Statutes modify insurable interest, these can RESTRICT LIABILITY such as the Carriage of Goods at Sea Act 1971 which limits the carries liability for goods; The Hotel Proprietors Act 1956 which means liability only exists if a room has been booked and damage occurred during the time the guest was entitled to use the accommodation.
What are the good faiths for both the insurer and insured in pre-contract negotiations?
Insurer
- Can’t introduce new non-standard terms to contract that haven’t been discussed
- can’t withhold that discounts are available for measures that improve a risk
- Must consider whether the presentation invites further questions
Insured
- Must disclose all facts
- Know what is material (important information)
- Cannot data dump
What are the legal positions if the insured in a consumer?
Under the Consumer Insurance Act 2012 the consumer has a duty to take reasonable care to make a fair representation.
The two types of misrepresentation are careless and deliberate.
The insurer must show they wouldn’t have entered into the contract or would have done so on different terms . They must also show it was deliberate.
If the insurer can prove it was deliberate they can void the policy and refuse all claims - and need not repay premium unless it is unfair to do so.
If careless and there are claims:
- if insurer would not have insured they can return premium and void the contract
- if would have offered insurance on different terms then the contract is treated as though it had been on those terms
- if the premium would have been higher the claims can be paid with a proportionate reduction
If careless and there are no claims:
- The first two points above remain the same
- The insurer can give notice to the insured of new terms or avoidance of policy
- insured can also give notice to terminate
- Premiums must be repaid for the balance of the contractual term
- Any claims during the notice period before termination must be considered in the normal way
Innocent misrepresentation does not give the insurer the right to decline a payment for personal insurances.
Legal position if the insured is not a consumer
The Insurance Act 2015 contains law on disclosure and representations for non-consumer insured.
The act states the insured must make a fair presentation of the risk, which is defined as disclosing every material circumstance which the insured knows or should know, or disclosure that gives a prudent insurer notice that they need to make further enquiries.
Case example is Carter v. Boehm (1766), where carter took an insurance policy against his fort which was not able to withstand attacks from Europe. Claim was not paid.
What is the concept of materiality?
Every circumstance is material if it would influence the judgement of a prudent insurer in fixing the premium or taking on the risk.
There can be physical hazards (type of heating installed) or moral hazards (criminal convictions)
What does not need to be disclosed to insurers by the insured?
Any circumstances if:
- It lessens the risk (makes the risk better, ie insd fit a sprinkler to a fire prone area)
- 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
What is an insurer ought to know and presumed to know?
An insurer is ought to know something that is known by an employee or agent of the insurer or somewhere in their organisation.
An insurer is presumed to know things that are common knowledge and things an insurer operating in that line of business would be reasonably expected to know.
What is the remedy if an insured breaches their duty of fair presentation deliberately/recklessly? Original Placement
The insurer must prove it is deliberate/reckless, and can avoid the policy ab initio whilst retaining premium.
What is the remedy if an insured breaches their duty of fair presentation neither deliberately nor recklessly? Original Placement
Depends on their response if they had been presented the information:
- if they would not have entered the contract at all the contract can be avoided but premium must be repaid
- If they would have entered the contract on different terms the contract is treated as if those terms were included
- If the premium would have been higher, any claims made will be paid proportionately (if only 80% premium paid vs expected, only 80% of claim value paid)
What is the remedy if an insured breaches their duty of fair presentation deliberately/recklessly? Variation
Insurer can terminate the contract from time of the breach and do not have to return the premium
What is the remedy if an insured breaches their duty of fair presentation neither deliberately nor recklessly? Variation
If the premium would remain the same or increased:
- if insurer would not have agreed the change, they can treat the contract as if the change never happened but must return any additional premium charged
- If the insurer would have agreed the variation but on different terms contract will be treated as if the changes have taken place and if premium should be higher claims are paid at a reduced rate proportionately
If the premium was reduced because of the change:
- If insurer wouldn’t have agreed, they can treat the contract as though the change never happened but any claims will be penalised
- If the insurer would have agreed the change on different terms the new terms apply
Assuming there is no clause in the wording or policy condition - when does the duty to disclose material facts (not affecting cover) start and end?
What’s the case for long-term policies?
In the case of a mid-term adjustment?
When renewal negotiations start and end when the policy incepts, unless there is a clause or policy condition saying there is a continuing duty to disclose.
Once the duty of disclosure has been pet in the negotiations and the policy starts, there is no duty of disclosure even in a material fact (insureds health for a life policy) changes.
When there is an adjustment the duty to disclose is revived in relation to that change.
How are risks placed in the London Market?
They are placed on a Market Reform Contract (a slip), this is different to a proposal form in that the broker summarises the risk.
How can an insurer waive it’s right to information in a proposal form?
Not asking for more info when the question is left blank or only partially answered.
If specifics are requested in a question, this can limit an insurers claim in the future for wider or further disclosure.
What does ‘Estoppel’ mean?
Estoppel is the legal term used for a bar or impediment that precludes a person from asserting a fact or a right.
More readable definition:
A delay in any decision that will affect another party, for example a delay in the decision to avoid or cancel a policy.
Does an insurer need to offer renewal terms?
What is important for an insurer to do if they are not offering renewal terms?
No, they do not.
The client must be informed they are going off cover and renewal terms aren’t being offered ‘in good time’
How does a cancellation clause typically work?
War coverage cancellations?
The insurer must send a letter (recorded or registered post) giving X days of notice till cancellation. The insurer must then return a pro rata premium based on the unexpired portion of the risk.
War Coverage:
- Allow cancellation on short notice with immediate re-actvation, allowing premium to be increased if the risk increases
- Cancellation if war breaks out between 2 of 5 names countries
