CHAPTER 2: Basic Insurance Legal Principles and Terminology

Question 1

What is contract law?

Answer 1

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.

Question 2

What are the essentials of a valid contract? What are the three most important?

Answer 2

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)

Question 3

What is Consensus ad idem?

Answer 3

Meeting of minds, meaning both parties are agreeing to the same thing.

Question 4

What is capacity to enter into legal relations?

Answer 4

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.

Question 5

What happens if a contract is missing the essentials?

Answer 5

The contract is considered “Void ab initio”, meaning void from the beginning.

Question 6

What type of contract is an insurance contract?

Answer 6

A simple contract, a contract made verbally or in writing but not under seal.

Question 7

When does a contract come into existence?

Answer 7

When one party makes an offer which the other accepts unconditionally.

Question 8

What is unconditional acceptance?

Answer 8

A response to the offer that accepts the terms, and does not try to change any of them.

Question 9

What is conditional acceptance?

Answer 9

A response to an offer that gives new terms to be accepted by the person who gave the original offer.

Question 10

What is Postal acceptance?

Answer 10

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).

Question 11

What is consideration in regards to a contract?

Answer 11

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.

Question 12

What is Insurable Interest? What are the 3 features?

Answer 12

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

Question 13

What is meant by Subject-Matter wrt Insurable Interest?

Answer 13

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)

Question 14

What is meant by Legal Relationship wrt Insurable Interest?

Answer 14

The relationship must be recognised at law (under the countries law the contract is subject to)

Question 15

What is meant by Financial Value wrt Insurable Interest?

Answer 15

There must be some financial downside or the action incurs awards/compensation against them.

Question 16

What is the Timing of Insurance for Life Assurance; Marine insurance and General Insurance Contracts?

Answer 16

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.

Question 17

How can Insurable Interest be created?

Answer 17

• 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.

Question 18

What are the good faiths for both the insurer and insured in pre-contract negotiations?

Answer 18

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

Question 19

What are the legal positions if the insured in a consumer?

Answer 19

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.

Question 20

Legal position if the insured is not a consumer

Answer 20

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.

Question 21

What is the concept of materiality?

Answer 21

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)

Question 22

What does not need to be disclosed to insurers by the insured?

Answer 22

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

Question 23

What is an insurer ought to know and presumed to know?

Answer 23

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.

Question 24

What is the remedy if an insured breaches their duty of fair presentation deliberately/recklessly? Original Placement

Answer 24

The insurer must prove it is deliberate/reckless, and can avoid the policy ab initio whilst retaining premium.

Question 25

What is the remedy if an insured breaches their duty of fair presentation neither deliberately nor recklessly? Original Placement

Answer 25

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)

Question 26

What is the remedy if an insured breaches their duty of fair presentation deliberately/recklessly? Variation

Answer 26

Insurer can terminate the contract from time of the breach and do not have to return the premium

Question 27

What is the remedy if an insured breaches their duty of fair presentation neither deliberately nor recklessly? Variation

Answer 27

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

Question 28

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?

Answer 28

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.

Question 29

How are risks placed in the London Market?

Answer 29

They are placed on a Market Reform Contract (a slip), this is different to a proposal form in that the broker summarises the risk.

Question 30

How can an insurer waive it's right to information in a proposal form?

Answer 30

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.

Question 31

What does 'Estoppel' mean?

Answer 31

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.

Question 32

Does an insurer need to offer renewal terms? What is important for an insurer to do if they are not offering renewal terms?

Answer 32

No, they do not. The client must be informed they are going off cover and renewal terms aren't being offered 'in good time'

Question 33

How does a cancellation clause typically work? War coverage cancellations?

Answer 33

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

Question 34

What are/can be the insureds rights to cancel?

Answer 34

It is uncommon for an insured to have cancellation rights (meaning they can even get back a proportion of the premium), however it is more common for an insured to have a right to cancel, but the insurer can charge for cover already provided at short-rates.

Question 35

What does it mean for a contract to be terminated due to fulfilment?

Answer 35

If a contract is fulfilled, i.e. the maximum coverage (Limit of Indemnity) is paid out. The contract will still be in force for the remaining period, but will not respond to claims.

Question 36

What are voidable contracts?

Answer 36

Where one party of a contract may set it aside, for example if an insured is in breach of a policy condition. This means the insurer has a choice to cancel in some form. If a condition is not met in relation to a specific claim/type of claim, this claim/claims may be voided but the policy remain in force.

Question 37

What are the two basic questions asked by insurers when a loss occurs and the insured makes a claim?

Answer 37

- Is there an active policy in place? | - Is the cause of the loss covered?

Question 38

What is a proximate cause and which case defined this?

Answer 38

The case of Pawsey v. Scottish Union and National (1907) A proximate cause means the active, efficient cause that sets in motion a train of events which brings about a result, without the intervention of any force started and working actively from a new and independent source. The proximate cause is always the dominant cause and there's a direct link between it and the resulting loss.

Question 39

How can we classify perils?

Answer 39

- Insured Perils - Excluded Perils - Uninsured Perils (not mentioned in the policy)

Question 40

What are the scenarios and outcomes when there are multiple perils that cause a loss?

Answer 40

- All perils are excluded/uninsured then the loss isn't covered - All perils are insured the loss is covered - One of the perils is excluded then the loss isn't covered - One of the perils is uninsured (unnamed in the policy) then the loss is covered

Question 41

What is the definition of indemnity?

Answer 41

Indemnity is the financial compensation sufficient to place the insured in the same financial position after a loss as they were immediately before the loss.

Question 42

What was special about the case of Catellain v. Preston (1883)?

Answer 42

It highlighted the principle of indemnity, that an insured cannot profit from their loss.

Question 43

What is a Benefit Policy?

Answer 43

A benefit policy is a short term policy not a policy of indemnity. It is different from an indemnity policy as it will not put the insured in the same financial position as they were at the start. (for example a life policy will pay out to a beneficiary.) Some exmaples are: Life Policies, annuity, pensions and investments, personal accident and loss of licence for air crew.

Question 44

For indemnity Policies, what are the settlement options for insurers?

Answer 44

Insurers can settle by: - Providing cash - Repair - Reinstatement - Replacement If not stated in the policy the insured has a right to financial compensation.

Question 45

For liability insurance, who receives the money?

Answer 45

The injured party receives the payment, not the insured.

Question 46

What is the case when a policyholder wants a replacement however the businesses associated with the insurer (where they get a discount) don't provide an acceptable alternative?

Answer 46

The FOS have said that the policyholder is entitled to a cash settlement equivalent to the amount they would get if they were to get the replacement from a business where the insurer gets a discount (the settlement is not discounted).

Question 47

What happens with repair settlements?

Answer 47

Where possible, an insurer may opt to repair an insured item as it is usually cheaper. For non-commercial the insurer will typically work with specific repairers (garages/repair companies) and pay the repairer directly. However, for commercial insurances it is usual that the insured will pay for the repairs and get indemnified by the insurer.

Question 48

Why do insurers use replacement settlements?

Answer 48

A speedy replacement can reduce further damage (i.e. replacing a glass window for a shop). It also stops any frauds from getting a lump sum if makign a fraudulent claim.

Question 49

What is reinstatement and how does it differ to repair?

Answer 49

Reinstatement is where the insurer will return (usually a building or machinery) to its condition pre-loss. They will do this by occupying the premises, and once they have started cannot stop even if the work goes over the Limit of indemnity.

Question 50

What is the measure of indemnity for a property insurance policy?

Answer 50

For completely destroyed property: the cost of replacement less an amount for wear and tear. For partially destroyed property: the cost of repair less and allowance for wear and tear.

Question 51

How is indemnity measured in a marine insurance contract?

Answer 51

A value is agreed upon at the start of the policy by the insurer and insured or if it is an unvalued policy then there is a formula in the marine insurance act to determine this.

Question 52

How is indemnity measured in property insurance? Give a broad guideline.

Answer 52

A broad guideline is the property value at the date and place of the loss

Question 53

What does it mean to be insured on a betterment basis? (property insurance - basic cover)

Answer 53

The indemnity for the loss is the cost of repair or reconstruction at the time of the loss. With allowances made if it cannot be repaired the same as before the loss or a replacement is required.

Question 54

What is a Reinstatement Memorandum?

Answer 54

The sum insured must represent the full value at the time of reinstatement, meaning the premium paid is based on the higher amount. This allows a margin for error in estimating the sum insured. The insured value must be at least 85% of the actual value or claims payments will be reduced. Reinstatement must be carried out without delay.

Question 55

What is Day One Reinstatement?

Answer 55

The insured must state the reinstatement amount on the first day of cover, insurer automatically uplifts this to allow for inflation (an extra 50% on the declared value) but only charge for 15% inflation. This is advantageous as the value will be accurate on day one.

Question 56

What is the way to measure indemnity using basic cover for machinery and contents?

Answer 56

The measure of indemnity depends if there is a ready second-hand market, if so then it is the second-hand price plus costs of transportation and installation. If there is no second-hand market, it is the cost of repair or replacement less an allowance for wear and tear.

Question 57

How is manufacturers stock in trade indemnified?

Answer 57

The insured is not entitled to payment in respect of any potential profit. The stock consists of raw materials, work in progress and finished stock. The indemnity value is the cost of raw materials at the time of loss, plus labour and other costs inurred.

Question 58

How is wholesalers and retailers stock in trade indemnified?

Answer 58

The insured is not entitled to payment in respect of any potential profit. The indemnity is the cost of replacing the stock at the time of the loss, including the costs of transport and handing costs. Stock cannot be insured on a reinstatement basis.

Question 59

How are household goods indemnified? Elaborate.

Answer 59

Basic cover would indemnify the insured for the cost of replacing the item at the time of the loss, subject to a deduction for wear and tear. New for old cover - removes the reduction for wear and tear, most insurers retain a deduction for wear and tear on linen and clothing, but will set the sum insured to the full amount of a new replacement, with the premium paid reflecting this.

Question 60

How is farming stock indemnified?

Answer 60

For livestock and produce, the local market is the basis of indemnity.

Question 61

How is liability insurance indemnified?

Answer 61

Indemnity is measured by court award or settlement plus the costs and expenses in connection with the claim.

Question 62

How is indemnity modified in agreed value policies?

Answer 62

The value of the subject matter (sum insured) is agreed to be a fixed value from inception. If there is a total loss (i.e. ship sinks) then this sum insured is fully paid out, commonly partial losses are settled as though the policy is unvalued (repairs for example).

Question 63

How is indemnity modified in First Loss policies?

Answer 63

When the full value of the subject is not really at risk, so the insured may request the sum insured is less than the full value. This means the insured is taking a risk that if there is more loss than what is insured it will not be paid by the insurer, only the value up to the sum insured.

Question 64

How is indemnity modified in new for old cover?

Answer 64

The value of the damaged property would be less than the new property that is replacing it.

Question 65

What are the limiting factors that may provide the insured less than full indemnity?

Answer 65

- The sum insured (a specified sum insured or a limit of indemnity for liability policies) - The inner limits/item limits (specific limits inside the overall LOI/sum insured that may cap a single item/peril) - The average (more details on another card, incl formula) - Excess/Deductible (distinguished on another card)

Question 66

What is the average condition, when does it apply and how is it calculated?

Answer 66

The average condition is that the insured is considered their own insurer for the amount they have chosen to not insure if there is underinsurance at the time of the loss. This means even partial losses will be shared between the insurer and insured in proportion to the amount of underinsurance. Formula for the amount to pay for insurer: (sum insured/value of all goods at risk)*loss This condition cannot apply to liability insurances but is common in commercial fire and theft, and most household policies. For agricultural produce this condition will not apply if the value at the time of the loss represents 75% of the actual value, the average will not apply.

Question 67

What are an excess, deductible and a franchise, give the general way to distinguish them.

Answer 67

An excess is paid on each claim (based on the excess wording) and is paid by the insured. Any value of the claim over the excess and up to the LOI is paid by the insurer, assuming a valid claim. The excess/deductible are always considered last, after other policy conditions/limits. A deductible is a voluntary amount that the insured will pay, and is also taken away from the limits of indemnity. (10k LOI, 2k deductible - max claim payout will be 8k) A franchise is where the the insured will pay up to the franchise amount, like an excess, however if the claimed amount exceeds the franchise amount then the insurer will pay everything up to the LOI and the insured will pay nothing.

Question 68

What is double (or dual) insurance?

Answer 68

Where a risk is insured twice.

Question 69

What is the contribution condition? Why must there be one in the policy?

Answer 69

The contribution condition restricts the insurers' liability to its rateable proportion of a loss. If there is no contribution condition then the insured it entitled to claim the whole amount from any liable insurer, meaning the insurer must recover the shares of the loss from the other insurers.

Question 70

What is the definition of contribution?

Answer 70

The right of an insurer to call upon other similarly, but not necessarily equally, liable to the same insured to share the cost of an indemnity payment.

Question 71

What conditions must be satisfied before contribution arises?

Answer 71

- Common subject-matter of insurance - Neither policy contains a non-contribution clause - Common insurable interest - Must be insured against common perils - Both policies must be liable for the loss

Question 72

What was the King and Queen Granaries Case?

Answer 72

A merchant deposited grain at a granary owned by barnett. Barnett and the merchant both have insurable interest in the grain, and insured it. The grain was damaged by fire, Barnetts insurers paid the whole claim. They tried to seek contribution from the merchants insurers, but were told it doesn't apply as their insureds' interests were different.

Question 73

What is Rateable Proportion?

Answer 73

Rateable Proportion is the share of any claim that an insurer pays when two or more insurers cover the same risk, usually in proportion to the respective sums insured

Question 74

How can rateable Proportion be calculated?

Answer 74

By Sum insured: (Policy sum insured/Total sums insured) * Loss By Independent Liability (Independent Liability under the policy/Total sum of individual liabilities under all policies) * Loss EXAMPLE: A limit = 30k, B Limit = 100k, Loss = 60k A liability = 30k, B liability = 60k, total = 90k

Question 75

What modifications can be applied to the principle of rateable proportion?

Answer 75

--A Non-contribution clause - if both policies have one they are treated as cancelling eachother out - More specific insurance clauses - mean if a more specific insurance policy is in place then the more specific policy pays instead of both contributing - Market Agreements

Question 76

What is Subrogation?

Answer 76

The right of an insurer following payment of a claim, to take over the insured's rights to recover payment from a third party responsible for the loss. This is limited to the amount paid out under the policy.

Question 77

What is tort?

Answer 77

A breach of the duty to act in a reasonable way to others.

Question 78

How can insurers get subrogation rights?

Answer 78

- Tort - Statute (example being riot compensation act 2016) Mainly instances where the insured is entitled to compensation from a third party.

Question 79

How can insurers recover some of their losses?

Answer 79

Through salvage - if the full sum insured is paid out but there is salvage value the insurer may become the owner of the salvage and sell it. - Certain market agreements - Subrogation

Question 80

What situations mean the insurers cannot exercise their subrogation rights?

Answer 80

- The insured has no rights - If the policy is a benefit policy, the insured is entitled to both the personal accident benefit ad the court award. - Through use of a subrogation waiver, usually to protect a parent or subsidiary company of the insured (common in commercial policies) - If the claim is due to a negligent fellow employee, due to the Lister V. Romford ice and cold storage Ltd case (father claimed as injured by son, insurance company recovered their outlay from the son)

Question 81

What is good faith?

Answer 81

The responsibility to fully disclose material information

Question 82

What is misrepresentation? How is it different to non-disclosure?

Answer 82

Misrepresentation is disclosing a fact incorrectly, non-disclosure is not mentioning it at all.

Question 83

What does it mean if an insured commits a reckless breach of their duty of fair presentation ?

Answer 83

They know they are breaching it but do not care they are doing so.