Chapter 2 - Legal factors: the parties and the wording

Question 1

English law of contract describes the relationship between..

Answer 1

two parties, one of which agrees to perform or do something, if and when the other party also performs or does something

Question 2

A contract is often defined as:

Answer 2

‘an agreement enforceable by law, between two or more persons to do or abstain from doing some act or acts, their intention being to create legal relations and not merely to exchange mutual promises’.

Question 3

Applying this definition of a contract to insurance, it may be said that an insurance contract is:

Answer 3

• an agreement;
• enforceable bylaw; and
• between an insured and an insurer.

Question 4

The insured agrees to …. and ………

In return, the insurer agrees to ……..

Answer 4

The insured agrees to pay a premium to the insurer and abides by the terms and conditions of the contract wording. In return, the insurer agrees to pay to the insured a sum of money or provide something of monetary value on the happening of a specified event.

Question 5

To ensure that a valid and enforceable contract is formed an agreement must satisfy certain criteria:

Answer 5

• offer and acceptance; and

* consideration.

Question 6

In addition to offer, acceptance and consideration, the following must be considered for a contract:

Answer 6

• an intention to create a legal agreement;
• possibility of performance;
• capacity to enter into legal relations;
• consensus ad idem (literally meeting of minds);
• legality; and
• certainty.

Question 7

If a contract is missing elements it may be …

Answer 7

declared invalid or set aside

Question 8

What is the legal term for a contract that cannot exist in law even though the parties involved may want it to?

Answer 8

void ab initio (from the beginning)

Question 9

All parties to a contract must

Answer 9

act in good faith which means that they must not mislead one another.

Question 10

What type of contract is an insurance policy and is a document necessary?

Answer 10

A simple contract and as a simple contract does not need to be evidenced in writing, it follows that a policy does not have to have been issued for cover to exist

Question 11

It is good practice for all parties to have evidence of the agreement by what means and how is this embodied in the insurance market?

Answer 11

A contract wording and this is embodied in the insurance market in the concept of contract certainty

Question 12

What requires all parties involved in the contract to know exactly what the terms are before inception, and that evidence of the contract is issued to the insured a short time after inception.

Answer 12

Contact certainty

Question 13

What is offer and acceptance?

Answer 13

A contract comes into existence when one party makes an offer which the other accepts unconditionally. A contract requires consensus reached by offer and acceptance, and until there is a clear offer and an unconditional acceptance, in writing if necessary, there will be no contract.

Question 14

What is Unconditional acceptance

Answer 14

This is an expression of absolute and unconditional agreement to all the terms set out in the offer. The
acceptance must exactly mirror the original offer made.

Question 15

What is Conditional acceptance?

Answer 15

Conditional acceptance (sometimes called a qualified acceptance) occurs when a person to whom an offer has been made tells the offeror that he or she is willing to agree to the offer, provided some changes are made to its terms or that some condition or event occurs. This type of acceptance operates as a counteroffer.

A counteroffer must be accepted by the original offeror before a contract can be established between the parties.

Question 16

What is Postal acceptance?

Answer 16

This is a rule of contract law that makes an exception to the general rule that acceptance is only created when communicated directly to the offeror. An acceptance is binding and the contract is said to be perfected when the acceptor places this acceptance in the post box for return mail even if, in fact, it never reaches the offeror.

Question 17

What is Consideration?

Answer 17

The consideration from the insured is generally the payment of the premium and the consideration from
the insurers is the promise to pay valid claims.

Question 18

In what case was consideration legally defined?

Answer 18

Currie v. Misa (1875)

Question 19

What was consideration legally defined as?

Answer 19

as:’… some right, interest, profit, or benefit accruing to one party, or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other.

Question 20

What is one of the elements necessary to create a valid insurance contract?

Answer 20

Insurable interest

Question 21

What is Insurable interest defined as?

Answer 21

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

Question 22

The following features of insurable interest may help to clarify the definition:

Answer 22

• subject matter;
• need for a legal relationship, but not necessarily ownership; and
• financial value.

Question 23

What are 2 important related terms to consider to clarify other aspects of insurable interest?

Answer 23

• the insurer’s own insurable interest; and

* anticipated insurable interest.

Question 24

When considering subject matter, it is important to look at both:

Answer 24

the subject matter of the insurance and

the subject matter of the contract.

Question 25

Subject matter of the Insurance is….

Answer 25

This is what is actually being insured, be it something physical such as a building, a car, a ship or some livestock, or the potential to be held legally liable for loss or damage to someone else or their property.

Question 26

Subject matter of the contract is…

Answer 26

This is the relationship that the insured has with the subject matter of the insurance. It might be ownership of property, responsibility for the safe keeping of goods stored in a warehouse, or liability as the owner of a restaurant if the customers contract food poisoning.

Question 27

How must the relationship of the insured with the subject matter be recognised for insurable interest to exist?

Answer 27

In law

Question 28

Is feeling responsible for something adequate for insurable interest to exist?

Answer 28

No - but it Is important for insurers handling international business to appreciate that the legal position differs from country to country. What is recognised under English law may not be under other countries’ laws and vice versa.

Question 29

What is financial value?

Answer 29

The idea here is that should something bad happen, then the insured may have a financial loss, either because something has been damaged or destroyed, or because they have incurred a legal liability which may result in an award of damages against them.

Question 30

What is Insurers’ Insurable Interest

Answer 30

Insurers have insurable interest to allow them to purchase reinsurance as protection against the risks
they themselves have written.

Question 31

What is Timing of Insurable interest

Answer 31

While all insurance contracts require insurable interest to be present, there are some differences between different classes of business regarding what point or points in the contract require it to be present.

Question 32

What is Anticipated insurable interest andwhat type of insurance contract does it relate to?

Answer 32

In most non-marine insurance contracts, it is not enough to merely expect to obtain an insurable interest, however certain that expectation might be. As we will see in the section below, this is not the case in marine insurance.

Question 33

When is insurable interest required in Marine insurance?

Answer 33

The Marine Insurance Act 1906 requires that there be an insurable interest only at the time of the loss, not when a policy is taken out. However, by virtue of the Marine Insurance (Gambling Policies) Act 19o9, it is a criminal offence to take out a marine policy if there is not a reasonable expectation of obtaining an Insurable interest.

Question 34

When is insurable interest required in Life assurance?

Answer 34

Prior to the Life Assurance Act 1774, it had become a form of game or wager to take out life insurance policies on a completely unconnected person. The Act made this illegal and required that there was an insurable interest at the time of taking out the policy. The person taking it out had to be named on the policy and could only recover to the extent of their interest.

Question 35

In what case was There was no requirement for insurable interest at the time of the claim?

Answer 35

Dalby v. The India and London Life Assurance Company (1854)•

Question 36

When is insurable interest required in

Answer 36

The Gaming Act 1845 extended the requirement for insurable interest beyond life assurance, hence a lack of insurable interest rendered the contract of insurance void for lack of one of the key ingredients. The main concept is the avoidance of gaming and wagering contracts, and common sense should prevail if the facts suggest the insurable interest was not in place at the exact moment the policy was taken out.

Question 37

What are three ways insurable interest arise or be created?

Answer 37

Common Law
Contract
Statues

Question 38

How does insurable interest arise under common law?

Answer 38

We all owe duties to each other and have certain rights under common law. These give rise to insurable interests.

Examples are ownership or exposure to liabilities to others under the law of negligence.

Question 39

How does insurable interest arise under contract?

Answer 39

There are situations in which we accept greater liabilities than those imposed by common law.

These occur when we enter into a contract that gives us greater responsibilities. A landlord is liable under contract for the maintenance of the property but can enforce responsibilities on the tenant under the same contract.

Question 40

How does insurable interest arise under statute?

Answer 40

There are some statutes which impose a positive duty and thus create an insurable interest.

Examples include, the:

• Settled Land Act 1925; and
• Repair of Benefice Buildings Measure Act 1972

These statutes make the tenants responsible for upkeep of the buildings they occupy. This gives the tenants an insurable interest in the building.

Question 41

Some statutes modify insurable interest. There are also statutes which restrict liability and, therefore, restrict insurable interest such as….

Answer 41

• Carriage of Goods by Sea Act 1971, which limits the liability of a carrier to a specific amount;
• Hotel Proprietors’ Act 1956;
• Carriers’ Act 1830; and
• Trustee Act 1925•

Question 42

Six parties typically involved in a commercial (re) insurance contract are:

Answer 42

• the insured or policyholder;
• the insurer;
• the reinsurer or reinsured;
• one or more brokers;
• the claimant, who may or may not be a third party; and
• other parties.

Question 43

The insured may consist of:

Answer 43

A policyholder or named insured (or even first named insured) as well as other parties, who may be called ‘additional insureds’ or simply ‘insureds’.

The policyholder is usually considered to be the party who is responsible for entering into the contract with the insurer.

Question 44

Who is usually the first names party under any information detailing the insured?

Answer 44

The policyholder

Question 45

The party who enters into the contract with the insurer is the only one amongst the insured parties who can do what?

Answer 45

• Has the right to enforce the contract
• The only one who has the right to cancel or alter the terms of the policy
• Has more duties under the policy e.g. as regards the notification of losses and material changes and/or the payment of the premium and taxes

Question 46

Usually, the other parties who are insured under the policy will need to rely on the policyholder to claim indemnity in the event of losses incurred or claims against them. How might this position be varied?

Answer 46

• By statute
• By the rules of agency
• By express provisions in the contract wording

Question 47

If a lead insurer has more administrative rights and duties under the policy than other co-insurers, where is this scenario more likely to be dealt with?

Answer 47

In a subscription agreement between the insurers on the risk within the market reform contract, rather than in the contract wording itself.

Question 48

A …. is the insurer’s …… The ….. is the insurer who is being insured by the ….. There is, therefore, a contract of insurance between the insurer (…..) and the ……

Answer 48

A reinsurer is the insurer’s insurer. The reinsured is the insurer who is being insured by the reinsurer. There is, therefore, a contract of insurance between the insurer (reinsured) and the reinsurer.

Question 49

In most circumstances, who is the policyholder’s agent, with the authority to bind them to the contract?

Answer 49

The broker

Question 50

Like any agent or adviser, the broker also has a contract with the policyholder or insured, promising….

Answer 50

either by implication or expressly that it will provide advice and administrative services with reasonable care.

Question 51

Commonly, insurers, through their underwriters, will give a broker what to accept risks of a certain type and up to particular limits on their behalf? In this situation, who is the insurer’s agent, with the authority to bind its principal within the scope of the authority given?

Answer 51

binding authority

the broker

Question 52

What does ‘privity of contract’ mean?

Answer 52

A contract can be an agreement between two or more parties and only those parties can enforce the terms of a contract

Question 53

What reformed the privity of contract rule and how?

Answer 53

Contracts (Rights of Third Parties) Act 1999 - Third parties who are not the main insured or policyholder may, due to the provisions of the act, acquire rights to enforce a term under the contract provided there is an express provision in relation to enforcement or they are named under the contract wording.

Question 54

How might claimants acquire rights under a policy?

Answer 54

As a beneficiary in trust

Question 55

What other parties can be included under an insured contract?

Answer 55

Loss payees
Commercial banks/lenders
Adjusters

Question 56

What distinguishes commercial (re)insurance contracts from most other agreements?

Answer 56

The obligation of utmost good faith that is owed by the insured to the insurer and vice versa.

Question 57

What case confirmed that both parties to an insurance contract has a duty to give disclosure to the other of all facts in their knowledge that are material to the risk being covered?

Answer 57

Pan Atlantic v. Pine Top (1994)

Question 58

In which case was it concluded that whilst the duty of disclosure continued to exist, it could be excluded by the parties’ agreement?

Answer 58

HIH Casualty and General Insurance Ltd v. Chase Manhattan Bank (2003)

Question 59

Do insurance contracts still remain contracts of utmost good faith under the Insurance Act 2015?

Answer 59

Yes

Question 60

What duty does the insured have in regard to disclosure?

Answer 60

The insured must disclose, in the pre-contractual negotiations, every ‘material circumstance’ they know or ought to know to give sufficient information to put a prudent insurer on notice that it needs to make further enquiries to reveal those material circumstances.

Question 61

What information does a purchaser of insurance have to provide?

Answer 61

An insured should make a fair presentation of the risk before entering into a contract by disclosing all material circumstances it knows or ought to know, or by making a disclosure which gives insurers sufficient information to put a prudent insurer on notice

Question 62

A broker approaches a coverholder on behalf of a prospective Insured and arranges a contract of Insurance with an Insurer. What contracts exist between the parties?

Answer 62

Broker and Insured - Agency contract
Broker and Coverholder - A binding authority agreement
Insurer and Insured - Insurance contract

Question 63

The insurer’s and policyholder’s duty is to give full disclosure of what?

Answer 63

any material information relating to the risk to be covered.

Question 64

Does a lead underwriter who accepts a risk, knowing that others within the market will respond to seeing their signature on the slip by accepting a line, owe a duty of care towards the subsequent or following underwriters.

Answer 64

No

Question 65

Authorisation to agree or amend contract wordings between the leading underwriter and broker, without the participation of the other parties is found where on the MRC?

Answer 65

Subscription Agreement

Question 66

Who commits the insured to the contract terms and typically owes a duty to the insured to check the suitability of the cover for the risk described?

Answer 66

The broker

Question 67

Brokers are generally under what duty in finding suitable insurers to take on the relevant risk at a good price?

Answer 67

to exercise reasonable care - this level of care is that reasonably expected in the relevant area of insurance.

They have to show that they can meet this standard by ensuring that they have found valid insurance or have told their principal if they are unable to do so.

Question 68

In the event of ambiguity, can brokers be found liable for not asking whether certain types of cover are required?

Answer 68

Yes

Equally, if a reasonably competent broker in the relevant field would be expected to spot a weakness in the client’s instructions, they have a duty to disclose this to their principal.

Question 69

The insurer’s agent or broker, typically acting under a binding authority or similar arrangement, has a duty to use reasonable care to do what?

Answer 69

• to ensure that the terms being proposed, the extent of the cover and any other arrangements, are satisfactory to its principal.

Anyone acting with binding authority must not exceed the scope of that authority.

Question 70

The drafting of a commercial contract wording will often be undertaken by who?

On large, complex risks, who else will also have an input into the drafting and review of the wording?

Answer 70

the broker or agent acting on behalf of the insured or an insurer

the risk management or legal department of an insured

Question 71

How do parties to a contract of insurance tend to resolve differences between the wording of the slip and the contract?

Answer 71

By negotiation and agreement between the parties

Question 72

What two documents may form the ‘commercial insurance contract’ and mean that the need to issue a separate formal policy has fallen away?

Answer 72

The MRC and its attached contract wording

Question 73

The MRC has enabled the insurer, broker and client to have evidence of contract certainty at what point?

Answer 73

At inception

Question 74

What is the principle behind Leading Underwriters Agreements (LUAs)?

Answer 74

To enable small changes to be made to contract terms by the leading underwriter, or perhaps two or more leading underwriters, without the change having to be shown to the whole market.

Question 75

Where is the LUA generally referred to on the MRC?

Answer 75

The ‘subscription agreement’

Question 76

Which two market bodies developed LUA’s over the past few decades?

Answer 76

Non-Marine Association (NMA) and individual broking houses

Question 77

In what case did the slip have an LUA clause that stated:

“Any amendments additions deletions including new and or managed and or chartered notice of assignment ratings and alterations of any description to be agreed by Leading Underwriter and to be binding on all others.”

Answer 77

Barlee Marine Corporation v. T R Mountain (1987)

The court refused to accept evidence of market practice and to distinguish between major and material alterations and minor and immaterial ones and, on a straightforward construction of the words of the clause, found for the plaintiff. This was because the wording allowed the leading underwriter to bind the other underwriters.

Question 78

In what case did the slip have an LUA clause that stated:

“All alterations, additions, deletions, extensions, agreements, rates and changes in conditions to be agreed by the Leading Lloyd’s underwriter and Leading Company Underwriter only. Such agreement to be binding on all underwriters subscribing hereon.”

Answer 78

Roadworks (1952) Ltd v. J R Charman and Others (1994)

the leading underwriter agreed to waive a condition on a slip by writing on a fax, which actually contained detrimental information: ‘cover as per slip granted’.

The following underwriters denied liability under the policy. The court held that the leading underwriter was an agent for the following underwriters. The LUA evidenced terms of the contract of agency and the leader had authority to waive even a contingent condition. In these circumstances the leader should have made it clear that they were initialling the fax only for their own line. The follow market was therefore bound by the leader’s action.

Question 79

The opportunity was taken to rationalise the use of Leading Underwriter Agreements as part of whose market reforms and what was used to replace all the existing agreements in standard format?

Answer 79

The LMP initiatives

The General Underwriters Agreement (GUA) in October 2001

Question 80

As detailed in the LMP ‘Introduction to GUA’, dated February 2014, the purpose of GUA is to: (5 things)

Answer 80

• create an agreement between the subscribing underwriters on a particular contract for the management of changes;
• clarify the extent of the delegated authority to the slip leader and agreement parties;
• enable each class of business to define their specific requirements/needs within a common framework;
• allow a single slip leader and/or agreement parties to agree contract alterations where empowered to do so by the GUA; and
• ensure all underwriters are notified of alterations where appropriate.

Question 81

Define the General Underwriters Agreement.

Answer 81

It is an agreement between insurers on a subscription risk specifying the terms on which the leading underwriter shall act as the agent of the following underwriters as regards the agreement of amendments to coverage terms.

Question 82

GUA recognises that various classes of business have specific requirements and there are now specific schedules available for: (9)

Answer 82

• non-marine;
• marine cargo;
• marine hull;
• (marine) liability;
• marine energy;
• excess of loss and treaty reinsurance;
• political risk;
• professional indemnity; and
• terrorism risks.

Question 83

The GUA relates to the level of delegated authority in respect of post placement alterations and contributes towards….

Answer 83

the aim of contract clarity and certainty by stating, more clearly than was previously the case, what can be agreed by authorising underwriters on behalf on the follow market.

Question 84

The benefit of the GUA for the insurance market is…

Answer 84

a clear, codified agreement process and a consistent approach to contract alterations.

Question 85

More specific terms on the Market Reform Contract will take precedence over the terms of the GUA.

True or False?

Answer 85

True

Question 86

The GUA also ensures that all underwriters are notified of alterations where appropriate. The means by which alterations are effected is by use of…..

Answer 86

….the existing endorsement system.

Question 87

When making alterations to the slip under a GUA, who decides upon the level of agreement?

Answer 87

The slip leader

Question 88

GUA Stamp A which contains the words:

“Notification to followers Yes/No

Within … working days”

is used in which market?

Answer 88

for the marine market, where the leader decides upon distribution for the follow market;

Question 89

GUA stamp B is for which market?

Answer 89

for the non-marine market

Question 90

Part 1 Alterations — Slip leader on behalf of all other underwriters These include matters which are:

Answer 90

• all alterations that the slip specifies are to be agreed by the slip leader only;
• non-contentious, such as change of name, unless material, clear typographical errors;
• within the terms of the slip, such as premium adjustments; and
• administrative.

Question 91

Part 2 Alterations — Slip leader and agreement parties on behalf of all other underwriters These include:

Answer 91

• all alterations specified, as may be agreed by the slip leader and agreement parties; and
• all alterations not within parts 1 or 3.

The alteration does not become effective until the slip leader and all agreement parties have agreed.

Question 92

Part 3 Alterations — Agreed by all underwriters These include:

Answer 92

• all alterations that the slip specifies may only be agreed by all underwriters; and
• all alterations which are judged by either the slip leader or by any agreement party to be ones which ought to be agreed by all underwriters.

Question 93

Regardless of what level of authorisation applies, the agreement is for each underwriter’s proportion severally, with the leading underwriter and agreement parties acting as agent for each underwriter. Thus, a part 3 agreement only becomes binding on each underwriter when?

Answer 93

A part 3 agreement only becomes binding on each underwriter when they have agreed it.

Question 94

The marine GUA stamp allows leaders to specify what?

Answer 94

If followers need to be notified and the timescale involved

Question 95

In other classes, some changes are specified within the schedule as having to be notified to the follow market in what timeframe?

Answer 95

Within 5 working days