Chapter 2: Legal Factors: the parties and the wording Flashcards
Key components of a insurance contract is…
an agreement, enforceable by law, between am insured and insurer
What are the essentials of a valid contract?
Offer and acceptance ; consideration
What is offer and acceptance
Party makes and offer and the other accepts unconditionally
What is conditional acceptance (Qualified acceptance)
Accept the offer provided that a few changes are made
What is consideration from the insured?
Payment of the premium
What are the features of insurable interest
Subject matter ; need for legal relationship ; financial value
What is subject matter of insurance
What is actually being insured
What is subject matter of contract
Relationship between insured and subject matter of insurance
Who undertakes the drafting of a commercial contract?
By the broker or agent acting on behalf of the insured or insurer
Why has the need to issue a separate formal document fallen away?
The MRC and its attached contract wording form the commercial insurance contract
What has the MRC allowed insurers, brokers and clients to do?
Evidence contract certainty at inception
What is the GUA and what did it replace?
General Underwriting Agreement and it replaced the Lead Underwriting Agreement
What is the purpose of a GUA?
- Agreement between subscribing underwriters for management of changes
- Clarify extent of delegated authority to the slip leader and agreement parties
- Enable each class to define their specific requirements and needs
- Allow single slip leader to agree contract alterations where they are empowered to
- Ensure notification of all underwriters where necessary
What does the GUA state more clearly?
What can be agreed by authorising underwriters
Is there a ‘hold harmless’ clause in the GUA?
No
When must the notification of other markets take place?
Within 5 working days
What is a ‘hold harmless’ clause?
Follow markets agree to waive any rights they have against the leader/authorising insurers
Do the slip leaders and agreement parties owe a duty of care to the following underwriters?
Yes, as they are their agent
Is there several or joint liability under the GUA?
Several not joint
When can underwriters opt-out of the application of the GUA?
Inception or currency of the cover
What law governs the GUA?
English Law
What is a coverholder?
A company or partnership or individual authorised by an insurer to enter into a contract of insurance on its behalf
Contract terms of the authorisation are generally authorised under…
Binding authorities
What do Binding authorities allow the insurer to do?
- Gain access to business it may not have a opportunity to see
- Obtain business in parts of the world where it does not have an office
- Benefit from local expertise
- Acquire income at low cost
What are the benefits for brokers when binding authorities are used?
Gain access to the Lloyd’s brand,
incur fewer costs in placing business;
cover can be given immediately
Who may coverholders be?
Specialist companies; insurance brokers; agencies
Does the coverholder hold responsibility for the risk it has undertaken?
No
What the 4 forms of binding authority?
- Full binding authority
- Limited binding authority
Lloyd’s Binding - Approved coverholders
- Restricted coverholders
What is full binding authority?
Defines classes of risk that may be bound.
What is limited binding authority?
Require prior approval or for the insurer to actually quote terms
What are approved coverholders?
Authorised to enter into contracts of insurance under ‘registered’ binding authorities
What are restricted coverholders?
Must be authorised to enter into contracts of insurance under ‘restricted’ binding authorities
Must be a company whose registered office is in the UK / a partnership in the UK and regulated by the FCA
Market arrangements are called…
Lineslips
Lineslips are used by brokers to…
establish a market for a class of business with a number of insurers agreeing their lines
How are risks bound on a lineslip
Under the facility by off-slips by the leader or leading underwriter
What is the relationship between the coverholder and insurer?
Coverholder is an agent for the insurer
When placing a lineslip whom does a broker owe a duty to exercise reasonable skill and care?
The leading underwriters
What is the Managing Agent’s Code of practice for delegated Underwriting?
All considerations to be taken into account by a managing agent when appointing a coverholder
How does the MRC for binding authorities differ from the Open Market MRC?
- Risk details section is replaced with Schedule and Non Schedule sections
- No requirement for several liability language as included already in binding authority wording
- GUA’s are not used
What is the factual matrix?
Test to help interpret terms with common sense as opposed to it literal meaning
What is departed from when using the factual matrix?
Words should be given their natural meaning where possible,
the parol evidence rule
What is the parol evidence rule?
Oral and written material cannot be admitted as evidence in a dispute about the meaning of a written contract
Contra Proferentum
Contract term is interpreted in a way least favourable to the party putting it forward
Interfoto rule
Unusual term that has not been disclosed can be ignored
Oral and written promises that contradicts the policy conditions gives rise to a
Collateral contract
Terms not stated but intended by parties are…
Terms implied by fact
Why may a implied term be necessary?
To give business efficacy
Terms implied by custom of usage are
terms implied by market of operation, locality or trade
Terms implied by law are
the rights and duties of partied based on the law
What is more important in insurance, conditions or warranties?
Warranties
Is cover terminated if a warranty is breached?
No due to IA 2015. Cover is suspended until the breach is
A condition that must be met before the contract can come into effect
Condition Precedent to the contract
What is a condition precedent to liability?
A term that allows insurers to avoid liability for a particular loss if the term is broken but not avoid contract as a whole
Conditions not viewed as being in the main agreement are known as
Collateral Conditions / Mere Conditions
Can insurers avoid the policy / claim if collateral conditions are breached?
No - can only claim for damages
How should a subjectivity be expressed as?
An unambiguous condition - specifying the responsibilities and timescales for resolution and any consequences of failure of the contract
What are the 4 things a subjectivity should set out?
- The condition/action that needs to occur
- the applicable timescale
- the terms which are to apply
- consequences which follow if not met
What case did the court state that multi-sectioned policies are composite not joint?
Printpak v AFG (1999)
What is the general feature when drafting of choice of law and jurisdiction clauses?
Keep simple and broad
What is a service of suit clause
Names a local organisation what the insurer has authorised to accept service of suit on its behalf
What is the main purpose of a service of suit clause?
Avoid delay and expense associated with the insured suing
Sanction breaches create…
criminal and civil liability
How do sanctions clauses protect an insurer?
Ensuring that it is not contractually required to perform certain activities with exposes it to sanctions
What should a sanctions clause be used alongside?
a compliance programme with due diligence and screening
What are sanctions clauses designed to protect against?
Matters which cannot reasonably be identified through pre-underwriting due diligence
Uncertainties inherent in sanctions regiemes
When completing a proposal form for property insurance, a business erroneously declared that its heating system was oil-fired instead of gas-fired. Following the implementation of the Insurance Act 2015, the insurance contract will:
not necessarily be voided from inception.
A riding school’s insurance includes a warranty that hay is kept in a separate store but this condition wasn’t satisfied until three months after the policy commenced. Subsequently, a fire broke out in just the office area. A claim for fire damage and losses:
will be paid because although there was a breach of warranty, it was remedied before the loss occurred.
Where insurance is provided by a syndicate, Lloyd’s or otherwise, the lead insurer is expected to:
have more administrative rights and duties under the policy than its co-insurers.
An underwriter has entered into a Leading Underwriters Agreement with the six other underwriters that have accepted risk on an insured. This agreement allows:
small amendments to be made by the lead underwriter to the contract between it and the other six underwriters, without the change being publicised.
Three underwriters for Lloyds specialise in insurance for light aircraft. The lead underwriter decided to accept the insurance risk of a small aircraft manufacturer, which subsequently made a £1 million claim. The lead underwriter:
does not owe a duty of care to the following underwriters of the same risk.
Was there a requirement for insurable interest at the time of the claim of Dalby V. The India and London Life Assurance Company (1854)
No
What is the principle of LUA’s?
Enable small changes to be make to contract terms by leading underwriter or 2+ leading insurers without having to notify the market
How can insurable interest be created?
By common law, contract and statue
What distinguishes insurance contracts from other contracts?
Obligation of good faith owed by the insured to the insurer and vice versa
What duty does both the insurer and policyholder have?
Duty to disclose any material information relating to the risk.
When a policy is issued does this override a slip?
Yes
If there is a dispute what is amended to reflect the true agreement?
Either the policy or the slip
Who prepares the closing document, setting out the extent of the underwriter’s obligation and commits the insured to the policy documents?
The broker
The contract terms of the authorisation are generally provided under?
Binding authorities
When do problems arise with delegated authorities?
When the scope of the authority is inadequately defined or the coverholder acts outside its authority
Does an express term override an implied term?
Yes
Do law districts need to match nation states?
No
What is a suspensory effect on sanctions?
Suspend an insurer’s liability to perform a contract for period they are in force
Do sanction clause affect the nature of cover given or scope of the cover?
No
Name four implied terms in an insurance contract
- In marine insurance - MIA 1906 carries automatically into every policy as an implied warranty that the insured vessel is seaworthy
- Subrogation
- Duty of good faith
- Insured’s duty to act as uninsured (No legal authority)
Name six exceptions to the parol evidence rule
- External evidence can be used to solve ambiguity
- Evidence of a custom
- Where a contract appears not to contain all terms of the agreement
- Evidence of an implied term is not covered
- Contract term can be overridden by express oral warranty or collateral contract
- Extrinsic evidence can be used to prove the identity of the parties
In what four ways can a term be implied into a contract?
- In fact
- In law
- By custom
- By usage
In respect of a commercial insurance contract wording, what does the factual matrix clarify?
The contextual meaning of the terms.
Within the terms of the General Underwriters Agreement, which party will typically agree a
premium adjustment following a quarterly declaration of turnover?
The slip leader on behalf of all other underwriters
In insurance contract law, a warranty may be a promise made by the insured in relation to
past facts, present facts or the continuance of a state of affairs.
A commercial reinsurance contract between an English reinsurer and a Chinese insurer states that exclusive English jurisdiction applies. What does this mean in the event of a dispute between the parties to the contract?
All parties must go to the English courts.
