Insurance contract formation and insurable interest

Question 1

In a typical insurance transaction, when is the offer made? Who is the offeror and who accepts?

Answer 1

• the proposal form which is submitted to the insurer will be the offer and the insurer will accept it by confirming cover or issuing the policy.
• The insurer may quote a premium based on information supplied in the proposal form and, in doing so, make an offer which the proposer may then accept or decline.
• There may be a long series of offers, rejections and counter-offers before a firm acceptance is made by one party or the other

Question 2

Deal now, detail later

Answer 2

insurance contracts used to be formed by a slip which was presented by a broker to a managing agent at Lloyd’s and the contract of insurance used to be formed at the moment that the slip was scratched (signed and stamped) by the underwriter.

Question 3

In insurance, the parties must have reached agreement on

Answer 3

• the nature of the risk and the subject matter of insurance (what is to be insured and what
perils are to be covered);
• the duration of the contract; and
• the amount of the premium

Question 4

How would consideration apply in an insurance contract?

Answer 4

The consideration furnished by the insured in an insurance contract is the premium payable and that
given by the insurer is the promise to pay claims

Question 5

Insurance contracts which must be in writing

Answer 5

Marine insurance -(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.
Note that a contract of marine insurance may be formed without the existence of the policy
but, in order to be able to make a claim against the insurer, the insured must hold a policy

Question 6

Insurance contracts which must be evidenced in writing

Answer 6

Contracts of guarantee

Question 7

Life insurance contracts are also subject to some formal rules

Answer 7

Section 2 of the Life Assurance Act 1774 requires that the policy shall contain the name of the person interested in it (which suggests the need for a formal policy). Other legislation may require insurers to send to the insured a statutory notice advising them of their right to cancel the policy within a ‘cooling-off’ period.

Question 8

The main statutes covering insurance companies

Answer 8

Financial Services and Markets Act 2000 and the Financial Services Act 2012.

Question 9

Under the Financial Services Act 2012, the financial services sector in the UK is regulated by
two bodies

Answer 9

• Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA).
• The PRA authorises financially important firms such as banks, building societies and insurers (both general and life insurers). It also regulates them for prudential issues (capital/solvency etc.).
• The FCA authorises smaller firms such as financial and insurance intermediaries and also regulates them for prudential issues. The FCA regulates all authorised firms for conduct of business issues.

Question 10

Insurable interest,

Answer 10

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

Question 11

key elements of insurable interest

Answer 11

• a subject matter of insurance;
• the policyholder must have an economic or financial interest in the subject matter of insurance;
• the interest must be a current interest, not merely an ‘expectancy’; and
• the interest must be a legal interest.

Question 12

two main reasons why the law requires insurable interest:

Answer 12

to reduce moral hazard; and

to discourage wagering.

Question 13

ways in which insurable interest mayarise.

Answer 13

• common law - automatically presumed e.g ownership of asset

- contract - accept responsibility for something for which they would not ordinarily be liable. eg reinsurance

Question 14

statute currently governing marine insurance

Answer 14

Marine Insurance Act 1906, s.4 of which makes marine policies void in the absence of insurable interest.

Question 15

Time insurable interest is acquired under marine policy

Answer 15

s.6 provides that the insured must be interested in the subject matter insured at the time of the loss. There is no requirement of insurable interest when the contract is made, and it does not matter that since the time of the loss the interest has ceased.

Section 6 also allows the subject matter of a marine policy to be insured ‘lost or not lost’, which means that it is possible for the insured to recover under a marine policy even if they acquired their interest after the loss has occurred, unless they were aware of the loss and the insurer was not.

These rules reflect the practices of marine trade where cargo frequently changes ownership in the course of transit.

Question 16

major provisions in the life assurance Act 1774 ( excludes goods n merchandises)

Answer 16

• The person benefiting from the insurance must have an insurable interest in the life or event insured.
• The name of the person for whose benefit the policy has been effected must appear in the policy (s.2).
• The insured can recover no more than the amount of the value of their interest (s.3).

Question 17

Time when interest is required in life assurance

Answer 17

insurable interest is required at the time when the contract is made – i.e. at inception. However, there is no requirement to prove an interest when a claim arises on death or maturity of the policy.

Question 18

Policies on goods

Answer 18

Policies on goods are not subject to any statutory requirement of insurable interest (other than on goods involved in a marine adventure

Question 19

Gambling Act 2005

Answer 19

The Act provides that ‘the fact that a contract relates to gambling shall not prevent its enforcement’. The effect of this, apparently, is to bypass the need to prove an insurable interest in policies on goods and, possibly, bypass the need to prove an insurable interest in relation to any policy which is neither life nor marine

Question 20

What is the effect of a void insurance contract?

Answer 20

money paid under a void contract is usually recoverable, which means that a policyholder who has paid the premium for a void insurance policy should be able to recover it and payments made by an insurer under such a policy should also be recoverable. However, policies governed by the Life Assurance Act 1774 are illegal as well as void.

Money paid under an illegal contract cannot be recovered in court provided the parties are ‘in pari delicto’ (‘equal in wrongdoing’). In this case, the insured may not, as a matter of law, be able to recover the premium that it haspaid.

Question 21

examples of persons who may have an insurable interest in property

Answer 21

• Outright owners of property.
• Part or joint owners.
• Mortgagees and mortgagors
• Executors and trustees
• Landlord and tenant.
• Bailees
• people living together
• Finders and people in possession

Question 22

business relationships that could give rise to an insurable interest.

Answer 22

-Partners
-Employer and employee
-creditor and debtor
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