Chapter 5: Insurance Contract Formation & Insurable Interest

Question 1

When does an insurance contract come into existence?

Answer 1

When the offer made by one party is unconditionally accepted by the other.

Question 2

What is the Market Reform Contract?

Answer 2

Prior to 2007, contract was formed via a slip presented at Lloyds at that moment the underwriter signed their %.

“Deal now, detail later”.

Led to conflicts between slip and policy, so MRC was introduced. By a broker presenting the MRC / slip, this is the offer. The underwriter signing the slip is the acceptance.

Question 3

Can an offer be accepted by doing nothing?

Answer 3

No, acceptance must generally be communicated to the other party.

Question 4

What needs to be agreed to effect a contract? Think about the essential terms.

Answer 4

1. the nature off the risk and the subject matter insured.
2. the duration of the contract.
3. the amount of premium or the rate.

Question 5

Why is fresh offer and acceptance required at renewal?

Answer 5

Because in renewing an insurance contract, a fresh contract is formed.

The renewal notice can be seen as the offer and payment of the premium by the insured is acceptance. Unless a new prop is required, then it’s just an invitation to treat.

A counter offer arises where the insured notifies the insurers of changes to their risk, so terms need to be amended.

Question 6

When is a promise legally binding?

Answer 6

When it is supported by consideration i.e the value given in exchange for it.

Question 7

Can a contract be in effect if the premium is not yet paid?

Answer 7

Yes. A promise to pay is as good consideration as payment itself.

Unless the insurer has stipulated that the risk will not run until the premium is paid.

Question 8

When may a risk fail to run?

Answer 8

If the proposal is withdrawn after the premium has been paid.

If the policy has been void for mistake if there was no meeting of the minds over what was being insured.

If the policy is void because there was no insurable interest.

If the policy has been avoided ab initio.

Question 9

If a policy is voided for illegality, is the insured entitled to an RP?

Answer 9

Usually they will have no right to recover the premium.

Question 10

What is the only type of insurance that must be in writing?

Answer 10

Marine insurance policy under the 1906 Marine Insurance Act.

Doesn’t have to be full though, can be barebones info.

Question 11

What is an insurers obligation if they grant cover to a minor?

Answer 11

They are obliged and fully liable to meet all valid claims under the policy, even though the minor themselves is not contractually bound (unless beneficial or a necessity). However in practice, this is not really upheld.

Motor insurance is probably the only real “necessary” that a minor may contract into.

Question 12

What are the two main statutes covering insurance companies?

Answer 12

1. Financial Services and Markets Act 2000

2. Financial Services Act 2012

Question 13

What is Insurable Interest?

Answer 13

The policyholder must be in a position where they will suffer loss if the event which they have insured against occurs.

You have a vested interest in the subject matter.

Question 14

What are the four key elements of Insurable Interest?

Answer 14

1. A subject matter of insurance
2. Policyholder must have a financial interest in the subject matter
3. The interest must be current
4. The interest must be legal

Question 15

What did the Lucena v Craufurd case decide in 1806?

Answer 15

That mere expectancy that there will be insurable interest in the future is not enough.

It was RE wanting to insure captured enemy ships whilst they were still on the high seas and not in safe port.

Question 16

Why does the law require insurable interest?

Answer 16

1. To reduce moral hazard (i.e. being less careful and trying to actually make the loss occur)
2. To discourage wagering (betting / gambling)

Question 17

What are the two ways in which Insurable Interest arises?

Answer 17

1. Common Law - automatically presumed to exist (i.e. ownership of vehicle = ii)
2. Contract - legally accepting responsibility for something which they would ordinarily not be liable for

Question 18

When are Marine Policies void?

Answer 18

Under the Marine Insurance Act 1906, a policy is void if there is no insurable interest.

Question 19

The Marine Insurance Act 1906 states that Insurable Interest must be in effect when?

Answer 19

At the time of the loss.

There is no requirement of insurable interest when the contract is made or if it has ceased after the time of the loss.

Question 20

What does the 1774 Life Assurance Act prohibit?

Answer 20

The making of any policy on a life of a person or an event, where there is no interest, for the purpose of gaming or wagering.

Question 21

What are the four major provisions of the 1774 Life Assurance Act?

Answer 21

1. The person benefitting from the policy must have insurable interest
2. The person benefitting must be named on the policy
3. The amount one can recover is no more than the value of their interest
4. The Act doesn’t apply to ships, goods or merchandises

Question 22

In Life Insurance, when must there be insurable interest?

Answer 22

When the contract is made.

No need to prove ii at the time a claim arises.

Question 23

What is the effect of having a policy without Insurable Interest?

Answer 23

It will generally be void. If so, the money paid under a void contract is usually recoverable.

If it is illegal as well as void, then money cannot usually be recovered.

Question 24

What is a criminal offence under the Marine Insurance (Gambling Policies) Act 1909?

Answer 24

To take out or effect a marine insurance policy without insurable interest

Question 25

What are the two main categories of insurable interest (persons) in the field of life insurance?

Answer 25

1. Family Relationships - where it may be hard to pin point a precise financial interest but it is presumed to exist because of a natural tie of love and affection.
2. Business Relationships - where interest occurs in the life of another as a result of doing business dealings with them.

Question 26

What law states that a husband and wife have an unlimited insurable interest in the life of each other?

Answer 26

The Married Women’s Property Act 1882.

A women is also able to insure her own or her husbands life for her own benefit.

Question 27

Does ‘Family Relationships” regarding insurable interest extend to parents / children?

Answer 27

No. Only husband / wife. A child cannot legally insure their parents and vice versa.

Question 28

What 3 relationships could give rise to Insurable Interest under a “Business Relationship”?

Answer 28

1. Partners - as sometimes may be legally obliged to buy each other out if one dies.
2. Employer / Employee - an employee can insure up to a sum representative of their wage / salary for their notice period in their contract. Only in personal business contracts, not that of a company as companies cannot die.
3. Creditor / Debtor - creditor has ii in the debtor as they will financially lose out if the debtor dies and the money is not repaid.

Question 29

Can an employer take out life insurance on an employee?

Answer 29

Yes. Up to their wage or the cost of training a new employee to fill the role.

This is known as key-man insurance.

Question 30

Who may have an insurable interest in “property”?

Answer 30

1. Outright owners
2. Joint owners
3. Mortgagees
4. Landlord / tenant
5. People living together

Question 31

Can someone with limited interest insure property?

Answer 31

Yes. Even a part owner can insure the property for its full value, however the claim payment may be divvied up to the other owners.

Think about a person with a mortgage. The policy will only pay the person the amount of debt outstanding, even if the property was fully insured. The rest goes to the mortgagor / bank.

Question 32

What does BI insurance cover?

Answer 32

Profits which is lost following damage to the insured’s property (i.e machinery, factory, etc)

Question 33

What was the first test case for BI and Covid in the UK?

Answer 33

FCA v Arch Insurance UK Ltd (2020/21).

Arch was not sued, the FCA just wanted to go through the motions to see how the different policy wordings would respond so that they could streamline the claims process.

14 out of 21 selected policy wordings would uphold BI COVID claims.

Question 34

Who is the subject matter in a reinsurance contract?

Answer 34

It is the original insurer’s liability to indemnity their policyholders.