Chapter 2 Basis insurance principles and terminology

Question 1

What are the essentials of a valid contract

Answer 1

Offer and acceptance

Consideration

Question 2

What is usually the consideration in insurance

Answer 2

The premium

Question 3

Does a conditional acceptance form a valid contract

Answer 3

No it is not an acceptance it is a counter offer

Question 4

If I post an acceptance when is it deemed that I have accepted an offer

Answer 4

When acceptance is posted

Question 5

What duty do consumers have under the Consumer Insurance Disclosure & Representations Act 2012

Answer 5

Duty to take reasonable care not to make a misrepresentation

Question 6

What did the Insurance Act 2015 introduce?

Answer 6

Duty to make fair presentation of a risk for a non-consumer contract replacing utmost good faith

Question 7

Who does the duty of good faith apply too?

Answer 7

Both insured and insurer

Question 8

What must the insurer disclose as an act of good faith?

Answer 8

Only taking on risks which the insurer is registered to accept
Ensuring statements are true and not misleading
Entitlement to discounts etc.

Question 9

What is the duty of disclosure?

Answer 9

In all insurance negotiations there is a duty to disclose material circumstances, particularly at the proposal stage.

Question 10

When is the duty of disclosure revived?

Answer 10

At each renewal date unless it is a continuing one.

If there is an alteration to the policy

Question 11

Who does the Consumer Insurance Disclosure Representations Act 2012 apply to?

Answer 11

Consumers not commercial customers

Question 12

What defines a consumer under the act?

Answer 12

Someone who takes out insurance wholly unrelated to the individuals trade.

Question 13

Who does the Insurance Act 2015 apply to?

Answer 13

Non-consumer i.e. commercial customers

Question 14

What must the insured disclose under the insurance act?

Answer 14

Material circumstances the insured knows or ought to know
Disclosure in a manner which could be reasonably clear and accessible to insurers
Facts substantially correct, representations of belief made in good faith

Question 15

Who does the onus shift to under the Insurance Act?

Answer 15

It has shifted from the insured to the insurer, which is assumed to know information that would be expected of it.

Question 16

What policies generally have a continuing requirement of duty of disclosure?

Answer 16

Commercial property

Motor insurances

Public liability insurances.

Question 17

Does the duty of disclosure revive on alteration of a policy?

Answer 17

Yes if there is a need for an endorsement to the policy.

Question 18

What happens if the consumer does not provide material circumstance or a question asked by the insurer does not follow it up?

Answer 18

The Insurer has waived its right to the information and cannot claim there has been a breach of duty of disclosure.

Question 19

What is meant by the term Ab Initio?

Answer 19

From the beginning

Question 20

What are some examples of physical hazards?

Answer 20

Construction, nature of use, heating, electrical systems

Question 21

What are some examples of moral hazards?

Answer 21

Criminal convictions, lack of good management, excessive, willful carelessness

Question 22

What does the Insurance Act 2015 state about material circumstances?

Answer 22

A circumstance or representation is material if it would influence the judgement of a prudent insurer in determining whether to take the risk and if so on what terms

Question 23

What facts do no require disclosure?

Answer 23

Facts of law, 
Facts of public knowledge 
Facts that lessen the risk
Facts where the insurer has waived its right
Facts a survey should reveal
 Facts that the insurer does not know.

Question 24

What facts do not require disclosure in non-consumer policies?

Answer 24

Facts that diminish the risk
Facts the insurer knows,
Facts the insurer ought to know,
Facts the insurer is presumed to know
Facts that the insurer has waived its rights.
Facts of law
Facts a survey should have revealed

Question 25

What did the Legal Aid, Sentencing and punishment of offenders act 2012 (LASPO) change?

Answer 25

The rehabilitation periods now contains a buffer period after the custodial sentence.

Question 26

What is the rehabilitation period fora custodial sentence of more than 4 years?

Answer 26

Never spent

Question 27

Buffer period for a non-custodial sentence such as fines or community orders?

Answer 27

1 year

Question 28

Are any claims payable if a policy is Ab Initio?

Answer 28

No claims will be payable

Question 29

What happens if the consumer proposer purposefully or recklessly answers questions wrong?

Answer 29

The insurer is entitled to avoid the policy ab initio.

Question 30

What does the insurer have to do if they were misrepresented information but would have taken the policy on at a higher premium?

Answer 30

They are able to reduce the claim proportionately, meaning the insurer would only have to pay a certain percentage of the claim rather than the full amount.

Question 31

What is the calculation for reducing proportionality?

Answer 31

Loss multiplied by premium actually charged / higher premium

Question 32

What are the rules of disclosure in regards to compulsory motor insurance?

Answer 32

The insurer must pay compensation for injury and property damage for the third party, then claim back the amount from the insured.

Question 33

What is the definition of the principle of contribution?

Answer 33

“ The right of an insurer who has paid under a policy to call upon others similarly but not necessarily equally liable to the same insured to contribute to the payment”

Question 34

If a policyholder had two life policies would contribution apply?

Answer 34

No, as life policies are benefit policies

Question 35

Identify two ways the principle of contribution is modified.

Answer 35

1. Policies contain non-contribution conditions | 2. There are market agreements between insurers where they agree not to seek contribution in certain instances

Question 36

Identify five aspects that must be common to both policies for contribution to apply.

Answer 36

``` P eril (cover same peril) I ndemnity (both policies of indemnity) I nsurable Interest (cover same insurable interest) L iable (both policies liable for loss) S ubject matter (both policies cover same subject matter of insurance ```

Question 37

What does a rateable proportion contribution condition state

Answer 37

That the policy will only pay their proportion of the loss

Question 38

What does a non-contribution clause state?

Answer 38

That the policy will not contribute to a loss if it is covered under another policy

Question 39

If both policies contain a non contribution clause what happens?

Answer 39

The loss is shared proportionately.

Question 40

What does the specific insurance condition state?

Answer 40

That insurers will not contribute to a loss if the loss is more specifically insured?

Question 41

Identify two market agreements on contribution

Answer 41

Claims under driving other cars extension - vehicle insurers do not seek contribution from driver's insurers Travel and household

Question 42

Define "subrogation"

Answer 42

“the right of one person, having indemnified another under a legal obligation to do so, to stand in the place of that other and avail himself of all the rights and remedies of that other, whether already enforced or not”

Question 43

What are the two method for sharing losses between policies under the principle of contribution

Answer 43

Sum insured method Independent liability method | Independent liability method

Question 44

How does the sum insured method operate?

Answer 44

Insurer A pays Loss multipled by Sum Insured of Insurer A divided by total sum insured of Insurer A and B

Question 45

When is the sum insured method used?

Answer 45

On property claims where the policies are not subject to average.

Question 46

How does the independent liability method work

Answer 46

Loss shared in proportion to liabilities of each insurer if the other had not been paying the loss

Question 47

Identify three ways that subrogation rights may arise.

Answer 47

In tort eg negligence In contract Under statute e.g. Riot Damages Amendment Regulations (2007)

Question 48

What do we mean by salvage

Answer 48

If an insured pays a total loss to the insured they are entitled to retain what is left of the item insured eg written off car

Question 49

Identify two market agreements on subrogation

Answer 49

ABI Memorandum of understanding – subrogated motor claims | Immobile property agreement

Question 50

Identify four ways subrogation rights may be precluded.

Answer 50

The Insured has no right The policy is a benefit policy Insured has given another party a subrogation waiver Negligent fellow employees - insurers do not subrogate against

Question 51

What is the proximate cause?

Answer 51

The dominant cause of a loss

Question 52

For the first cause to be the proximate cause must the chain of events be broken or unbroken

Answer 52

Unbroken

Question 53

What is an insured peril?

Answer 53

Those named in policy as covered

Question 54

What is an excluded peril?

Answer 54

Those named in policy as specifically not covered

Question 55

What is an unnamed or uninsured peril?

Answer 55

Perils not mentioned in policy

Question 56

If a loss is caused by an insured peril (eg Fire) and the insured peril is the proximate cause is the loss covered?

Answer 56

Yes

Question 57

If a loss is caused by an excepted peril (eg war) and the excepted peril is the proximate cause is the loss covered?

Answer 57

No

Question 58

If a loss is caused by an uninsured peril (eg water) but an insured peril eg fire is the proximate cause is the loss covered

Answer 58

Yes

Question 59

What is the definition of "indemnity"?

Answer 59

“To put the Insured as close as possible to the same financial position after a loss as they were immediately before the incident”

Question 60

Identify two types of insurance that are benefit policies i.e. not policies of indemnity.

Answer 60

Life Personal accident | Personal accident

Question 61

Identify four ways a property insurer can indemnify an insured

Answer 61

Cash Repair Replace Reinstate

Question 62

What are the two ways indemnity is measured on a Marine policy?

Answer 62

Valued policy as agreed | Unvalued policy as per formula in Marine Insurance Act (1906)

Question 63

What would "indemnity' be on property policy covering buildings?

Answer 63

Replacement cost less wear and tear

Question 64

On what basis are most buildings insured under a property policy?

Answer 64

Reinstatement basis (new for old)

Question 65

If a building is insured on a reinstatement basis what condition of average usually applies?

Answer 65

85% condition of average

Question 66

If average applies and there is a claim for £10,000 and the sum insured is £90,000 and the value of the item insured is £100,000 how much do insurers pay for the loss?

Answer 66

£9,000 = £10,000 x £90,000/£100,000

Question 67

If a building is insured on a reinstatement basis and the 85% condition of average applies and there is a claim for £10,000 and the sum insured is £90,000 and actual reinstatement value of the item insured is £100,000 how much do insurers pay for the loss?

Answer 67

£10,000 as the sum insured £90,000 exceeded 85% of the actual reinstatement value so average does not apply

Question 68

If a building is insured on a reinstatement basis and the 85% condition of average applies and there is a claim for £10,000 and the sum insured is £80,000 and actual reinstatement value of the item insured is £100,000 how much do insurers pay for the loss?

Answer 68

£8,000 = £10,000 x £80,000/£100,000 Average does apply as the sum insured £80,000 is less than 85% of the actual reinstatement value

Question 69

What is the typical valuation of indemnity for manufacturer's stock under a property policy

Answer 69

Cost of raw materials plus labour costs incurred to date

Question 70

What is the typical valuation of indemnity for wholesaler's stock under a property policy

Answer 70

Cost of replacing stock including transport costs

Question 71

The inflation protection where by the insured declares the cost of reinstating the building at the inception date of the policy but the sum insured is the declared figure plus a specified percentage to cover inflation during the policy period and reinstatement period is called?

Answer 71

Day one

Question 72

Is property insurance on a Day 1 basis subject to 85% average?

Answer 72

No average will apply if the declared value is less than the actual reinstatement value of the building at the inception date of the policy

Question 73

What is the typical measure of indemnity on a household policy?

Answer 73

New for old

Question 74

What is the typical measure of indemnity for farming stock?

Answer 74

Market price

Question 75

What is the typical measure of indemnity on a liability insurance policy?

Answer 75

Compensation plus legal costs and expense subject to policy limit

Question 76

Identify three ways insurance policies modify the principle of indemnity

Answer 76

Agreed value policies (eg Fine Art) First loss policies (eg Theft) New for old/Reinstatement (eg Property)

Question 77

Identify five ways indemnity may be limited under a policy

Answer 77

``` Sum insured not adequate Limit of policy not adequate Sub limit applies Average applies Deductible/excess applies ```

Question 78

The average condition that applies when an insured has taken out two policies covering the same stock is known as?

Answer 78

Two conditions of average

Question 79

If a loss is £30,000 and there is a deductible of £5,000 each claim how much do insurers pay to the insured?

Answer 79

£25,000 (£30,000 less £5,000)

Question 80

Provide a definition of insurable interest

Answer 80

"the legal right to insure arising out a financial relationship recognised at law between the insured and the subject matter of insurance."

Question 81

What three elements are required for insurable interest to exist

Answer 81

Subject matter Legal relationship Financial value

Question 82

What is the difference between the subject matter of insurance and the subject matter of the contract in household insurance?

Answer 82

The house is the subject matter of insurance | The house owner's financial interest in the house is the subject matter of the contract

Question 83

When must insurable interest exist in marine insurance?

Answer 83

At time of loss only

Question 84

When must insurable interest exist in life insurance

Answer 84

Only at inception not at time of loss

Question 85

When must insurable interest exist in property and other insurances

Answer 85

At inception and time of loss

Question 86

Identify three ways insurable interest can be created

Answer 86

Common law e.g. ownership Contract e.g. lease gives tenant responsibilities Statute eg Repair of Benefices Building Measures Act (1972) requires upkeep of building