Chapter 5 - insurance contract formation and insurable interest Flashcards
When does an insurance contract come into existence?
An insurance contract comes into existence when one party’s offer is unconditionally accepted by the other.
What is an invitation to treat?
invitations to treat which are merely invitations to the other party to enter into negotiations.
Who typically makes the offer in an insurance transaction
There’s no fixed rule; either the proposer or the insurer may make the offer. It could be through a proposal form submitted by the proposer or a premium quote provided by the insurer.
How is acceptance of an insurance offer usually finalised?
Acceptance may occur through confirmation of cover or issuance of the policy by the insurer, or through the proposer accepting a premium quote. Often, negotiations involving brokers or intermediaries precede a firm acceptance.
Is communication of acceptance necessary in insurance contracts?
Yes, generally, acceptance of an offer must be communicated to the other party.
What are the essential terms that parties must agree on for acceptance to be effective in insurance contracts?
or acceptance to be effective in insurance contracts, the parties must agree on the following essential terms:
The nature of the risk and the subject matter of insurance (i.e., what is to be insured and what perils are covered).
The duration of the contract.
The amount of the premium or the method by which the premium is calculated.
When does the risk begin to run?
While an insurance contract typically comes into existence upon the acceptance of an offer, the cover may not take effect immediately. The parties might agree that the risk will commence at a later date, such as when an existing policy with another insurer expires. In such cases, there is a binding contract to insure, but the risk has not yet attached. Insurers may also specify that the risk will begin upon the actual payment of the premium.
What is a unilateral contract, and how does it differ from a mutual promise?
A unilateral contract is one in which obligations are created only on the offeror, who promises to do something (e.g., make a payment) if the other party performs an act. In contrast, a mutual promise involves both parties making promises, such as the promise to provide cover in return for the promise to pay the premium. This mutual promise does not describe a unilateral contract.
Is a renewal notice considered an offer or an invitation to treat?
Whether a renewal notice is considered an offer or an invitation to treat depends on how it is worded and what action the insured is required to take after receiving the notice. If the insured is asked to pay the premium to renew the policy, then the renewal notice is typically considered an offer, which the insured accepts by paying the premium. However, if the insurer is inviting the insured to submit a fresh proposal, then the notice might be considered an invitation to treat. It depends on the specific wording and actions required by the insured after receiving the renewal notice.
Under what circumstances might the risk in an insurance contract begin at a later date?
The risk might commence at a later date if the parties agree to it, such as when transitioning from an existing policy with another insurer or upon the actual payment of the premium as stipulated by the insurer.
What is the significance of consideration in an insurance contract, and how does it apply?
Consideration, under English law, is essential for a legally binding contract, requiring something of value to be given in exchange for a promise. In insurance contracts, consideration is typically represented by the premium paid by the insured and the promise by the insurer to provide coverage. The risk may attach even if the premium hasn’t been paid, but insurers may stipulate otherwise. However, a promise to pay is considered valid consideration. It’s important to agree on the premium amount before finalizing the contract, although contracts can be formed with a premium “to be agreed” and then fixed later.
What are the general rules regarding the return of premium in insurance contracts?
Once the risk has commenced, the insured typically isn’t entitled to a return of premium if the contract ends prematurely because the premium is considered payable at the contract’s outset. However, parties can modify this by agreeing to installment payments or pro-rata returns upon premature termination. If the insurer never assumes any risk, the insured may recover the premium due to a “total failure of consideration.” Situations where the risk might fail to run include withdrawal of the proposal, policy voidance due to mistake or lack of consensus, absence of insurable interest, or breach of the duty of fair presentation of the risk. Cancellation clauses in contracts may also affect premium returns, with insurers commonly allowing partial returns upon mid-term cancellation.
What role does consideration play in forming an insurance contract?
Consideration, such as the premium paid by the insured and the promise of coverage by the insurer, is crucial for forming a legally binding insurance contract. While payment of the premium is typically expected, agreements with premiums “to be agreed” are also recognized.
What circumstances might lead to a return of premium in an insurance contract?
A return of premium may occur if the insurer never assumes any risk, leading to a total failure of consideration. Additionally, if a policy is withdrawn after payment, voided due to mistake or lack of consensus, or if there’s no insurable interest, the insured might be entitled to a refund. Breach of the duty of fair presentation of the risk or cancellation clauses in the contract, allowing for mid-term cancellations, can also influence premium returns.
In what circumstances might an insurance contract be established orally?
An insurance contract might be established orally, especially in urgent situations like over the phone, with a written policy issued afterward. However, certain legal requirements might mandate formalities, particularly in specialized areas like marine insurance.
What types of insurance contracts must be evidenced in writing?
Insurance contracts that must be evidenced in writing include contracts of guarantee, as mandated by the Statute of Frauds 1677, s.4.
How does contractual capacity affect insurance contracts?
The validity of an insurance contract depends on the parties having full legal capacity to contract, as discussed in Contractual capacity. Special rules apply to certain individuals and organizations
Which insurance contracts require written documentation?
In motor vehicle insurance, s.143 of the Road Traffic Act 1988 requires a written ‘policy’ of insurance to be in force before a motor vehicle is used on a public road. However, the requirement for a certificate of insurance to validate the policy was amended by s.9 of the Deregulation Act 2015.
The only type of insurance contract which must be in writing is a marine insurance policy
(Marine Insurance Act 1906, s.22). To comply with the Act, however, the policy need only
specify the name of the insured or their agent, be signed by or on behalf of the insurer and
specify the subject matter of the insurance with reasonable certainty.
What formal rules apply to life insurance contracts?
ife insurance contracts are subject to formal rules such as those outlined in the Life Assurance Act 1774. Section 2 of this act mandates that the policy contain the name of the person interested in it, and insurers may need to send a statutory notice to the insured regarding their right to cancel within a ‘cooling-off’ period.
How does insurable interest reduce moral hazard?
Insurable interest reduces moral hazard by ensuring that the policyholder has a genuine financial stake in the insured property or life. This prevents individuals from intentionally causing losses to collect insurance money.
