Chapter 7 - insurance contracts and key terms

Question 1

What is a breach by an insurer?

Answer 1

fail to indemnify the assured within a reasonable time for a valid claim.

The insurer’s failure to do so would be a breach of an implied term under IA 2015 section 13A.

Question 2

What is a breach by an insured?

Answer 2

when an insured may fail to pay the premium. In practice, it is
usually the insured rather than the insurer who breaches an insurance contract.

Question 3

What is a breach of pre-contractual information duties

Answer 3

the breach normally arises from a failure to
supply full and accurate information in the negotiations that lead up to the formation of the contract, in other words, before the contract has come into existence.

Question 3

What is an express warranty?

Answer 3

expressly stated in the policy itself,

Question 4

What is a breach of contract?

Answer 4

the breach arises from a failure to comply with a term of the contract itself,

so that the breach occurs after the contract has been made and as a result of one party not keeping to the agreement that has now come into force.

Question 5

What are statutory rules?

Answer 5

rules laid down in legislation

Question 6

What are common law rules?

Answer 6

rules developed by the courts

Question 6

Which act are insurance contracts excluded from?

Answer 6

Unfair Contract Terms Act 1977 (UCTA)

Question 6

What happens once a breach of warranty is remedied?

Answer 6

Once the breach is remedied, the suspension is lifted i.e. cover is provided again by the insurer.

Question 7

What is a warranty?

Answer 7

A warranty is, essentially, a promise made by the insured relating to facts or to something which they agree to do.

Question 7

What is a continuing warranty?

Answer 7

Continuing warranties are often applied by insurers to ensure that some aspect of good housekeeping or good management is observed by the insured.

Question 7

What is an exception / exclusion clause?

Answer 7

excuse insurers from liability

Question 8

What is an implied warranty?

Answer 8

Warranties may be implied in marine insurance only. Section 39 of the Marine Insurance Act 1906 carries the implied warranty of seaworthiness automatically into every policy of marine insurance.

Question 8

Under the Insurance Act 2015 if a warranty is broken what happens?

Answer 8

the insurance cover is suspended from the moment the warranty is breached until it is remedied.

In principle, the cover is suspended, even if the breach did not cause or have any connection with a loss.

Question 9

What is a condition?

Answer 9

In an insurance context conditions are contractual terms, other than warranties, that impose an obligation on the insured (either risk or claims related). Conditions can also be classified in various ways.

Question 9

What is a condition precedent to the contract?

Answer 9

A condition precedent to the contract is one which states, in one form of words or another, that the policy will not come into effect if the insured fails to comply with the term in question.

Question 9

What are conditions precedent to liability?

Answer 9

Conditions precedent to the insurer’s liability are often concerned with, but not limited to, the claims process such as notification of a claim within a specified time, or not to admit liability after causing an accident.

Question 9

What happens if there is a Breach of condition precedent to liability?

Answer 9

• The insurer is automatically discharged from liability for the claim which is tainted by the breach. Prejudice is irrelevant.
• The policy remains in force

Question 9

WHat happens is there is a breach of warranty?

Answer 9

–> Under the MIA 1906 and common law, cover terminated automatically and, in effect, the contract ended.

–> However, the IA 2015 repealed any rule of law in a contract of insurance which causes a breach of a warranty to result in the discharge of the insurer’s liability. Under IA 2015 section 10 the insurer has no liability under a contract of insurance in respect of any loss that occurs or is attributable to something that happens after a warranty (express or implied) has been breached but before the breach is remedied. In other words, the breach suspends the insurance cover during this period (assuming that the breach can
be remedied).

–> The insurer does not have to prove a connection between the breach and any loss that has occurred unless the warranty is intended to reduce the risk of loss of a particular kind, location or time, due to the application of IA 2015 s.11 (see Terms not relevant to
the actual loss on page 7/16).

–> The insured is permitted to remedy the breach; once it is remedied the suspension is lifted.

Question 9

what happens if there is a Breach of a condition precedent to the contract?

Answer 9

If a condition precedent is never fulfilled, the contract never comes into existence.

Question 10

What happens if there is a Breach of a ‘suspensive condition’?

Answer 10

Cover is suspended for as long as the insured fails to comply with the condition, but resumes if and when they start to comply with it again. The concept of suspension conditions was invented by the common law courts through interpretation of the term in question in order to avoid the draconian consequences of breach of a warranty available
in law at the time.

Question 10

what happens if there is a Breach of collateral (or ‘mere’) condition?

Answer 10

–> Remedy depends on the seriousness of the breach. In most cases the insurer is not entitled to reject the claim.

–> If the breach is not serious enough to entitle the insurer to terminate the policy, the insurer
cannot reject the claim and has to pay for the loss. However, it may claim damages in the form of reduction from the amount to be paid under the insurance contract.

Question 11

What is a promissory estopple?

Answer 11

A promissory estoppel means that an insured who has broken a warranty cannot enforce the contract unless they can prove that the insurers clearly indicated, by their words or conduct,
that they do not intend to rely on the breach of warranty as a defence to further liability under the policy.

Question 12

How would you distinguish between a breach of the duty of fair presentation of the risk and a breach of condition or warranty in insurance?

Answer 12

A breach of the duty of fair presentation of the risk normally arises from a failure to supply full and accurate information in the negotiations which lead up to the formation
of the contract – before the contract has come into existence. A breach of condition or warranty arises from a failure to comply with a term of the contract itself, so that the breach occurs after the contract has been made.

Question 13

What is the ejusdem generis rule?

Answer 13

The ejusdem generis rule provides that general words which follow specific words are taken as referring to things of the same kind as the specific words.

Question 14

What is the effect of the contra proferentem rule when interpreting an ambiguous term? How would this rule typically apply to a term in a consumer insurance contract?

Answer 14

Where the term is ambiguous, the courts will construe the term against the party that proposed it. In consumer insurance contracts, the insurer will usually set the terms.

Question 15

What is a warranty in insurance and how does it differ from a warranty in a noninsurance contract

Answer 15

A warranty in an insurance contract is a promise made by the insured relating to facts
or to something which it agrees to do. Breach of a warranty suspends the insurance
cover until the breach is remedied. A warranty in a non-insurance contract is a minor
term which, if broken, allows an action for damages only

Question 16

What is a continuing warranty in insurance

Answer 16

A continuing warranty is one in which the insured promises that a state of affairs will continue to exist or they will continue to do something. It may be applied by insurers to
ensure that some aspect of good housekeeping or good management is observed or to ensure that certain high risk practices are not introduced without the insurer’s knowledge.

Question 17

In what way can a warranty be created?

Answer 17

In marine insurance, warranties can arise expressly or impliedly. In non-marine insurance, warranties are express only.

Question 18

Distinguish between a condition precedent to the contract and a condition precedent to liability.

Answer 18

A condition precedent to the contract is one which states that the contract will not come into existence unless the condition precedent is satisfied.

If a condition precedent to liability (or recovery) is not observed, the insurers will be discharged from liability automatically for the loss which is tainted by the breach. The contract will not be terminated. There may be future claims if the insured complies with the condition precedent regarding those claims.

Question 19

What are collateral (or ‘mere’) conditions?

Answer 19

These are conditions which are not part of the main agreement to insure but are concerned only with a side issue such as the adjustment of the premium. Mere conditions in insurance are interpreted the same way as innominate terms in contract. In other words, the breach entitles to terminate the contract and claim damages only if it is so serious that it goes to the root of the contract.

Question 20

May insurers reject a claim for breach of warranty but allow the policy to continue?

Answer 20

Yes. The Insurance Act 2015 repealed any rule of law which provides that the cover is terminated automatically upon breach of an insurance warranty.

Question 21

What are the changes introduced by the Insurance Act 2015 to the remedy for breach of a warranty?

Answer 21

Under the IA 2015, the cover does not terminate automatically upon breach of a warranty, but is suspended during the period of time when the insured breached the warranty to when they remedied it. Hence, the IA 2015 permits the insured to remedy the breach. Section 11 may operate together with s.10 of the IA 2015 so that if the breach has no relevance to the loss, as described under s.11, the insurer may not rely on the breach to deny liability. However, this is only if the term in question does not define the risk as a whole and it aims to reduce the risk of loss of a particular kind, at a particular place and at a particular time.

Question 22

What is the main way in which English law distinguishes between a joint insurance and a composite insurance?

Answer 22

Under English law, the distinction between a joint and composite insurance hinges on the interests of the insured persons. If the insured persons share a common interest in the subject matter, for example where they are joint owners of property, the policy is likely to be joint. On the other hand, where the interests are different, as in the case of lessor and lessee, or mortgagor and mortgagee, the policy is likely to be composite.

Question 23

Why is it important to establish whether an insurance policy covering two or more persons is joint or composite?

Answer 23

A joint policy is ‘indivisible’, so that a breach or default by one insured (such as a breach of the duty of fair presentation of the risk by a non-consumer, breach of warranty or act of wilful misconduct by one insured) may cause the whole policy to fail.
By contrast, a breach or default by one insured under a composite policy may invalidate their own cover without affecting the right of other insured persons to claim, provided they the latter are innocent of the breach or default

Question 24

What are the terms of a contract?

Answer 24

The terms of a contract refer to the details of the agreement. Each term imposes a contractual obligation, and breaching these terms can lead to certain remedies

Question 25

How are contract terms classified in non-insurance contracts

Answer 25

In non-insurance contracts, terms are traditionally classified into conditions and warranties based on their importance and the consequences of their breach. Breach of a condition has more serious consequences than breach of a warranty.

Question 26

What is the difference between a warranty and a condition in the general law of contract?

Answer 26

A warranty is a term concerning a minor part of the agreement, and if it’s broken, the injured party can claim damages but generally can’t terminate the contract.

A condition, however, relates to an important aspect of the agreement and allows the victim to not only claim damages but also terminate the contract if it’s breached

Question 27

How are terms classified in insurance contracts

Answer 27

In insurance contracts, terms imposing obligations on the insured are categorized based on whether they require the insured to do something or not. These terms may be described as ‘conditions’ or ‘warranties’ in the contract.

Question 28

What rules govern the interpretation of words used in insurance policies

Answer 28

The interpretation of words in insurance policies is governed by statutory rules and common law rules. These rules help resolve disputes about the meaning and scope of words used in insurance policies

Question 29

What happens if the insured fails to comply with a term in an insurance contract

Answer 29

If the insured fails to comply with a term in an insurance contract, questions arise regarding the effect of the breach, such as whether the cover ends automatically, if insurers have the choice to end it, or if they can refuse payment of a claim or claim damages

Question 30

How does the Consumer Rights Act 2015 affect insurance contracts

Answer 30

The Consumer Rights Act 2015 provides protection for consumers in contracts, including insurance contracts. It prohibits unfair terms and terms that exclude or restrict liability for death or personal injury resulting from negligence

Question 31

How are inconsistencies in insurance policies handled by the courts

Answer 31

Inconsistencies in insurance policies are handled by various rules, such as prioritizing hand-written or typed words over printed words and giving precedence to the policy document over the proposal that led to the contract

Question 32

What is the contra proferentem rule in insurance contracts

Answer 32

The contra proferentem rule states that in case of ambiguity in an insurance contract, the clause is construed against the party who proposed it, giving the other party the benefit of the doubt