LM2 Chapter 8C Flashcards
Condition
The term ‘condition’ covers a number of different elements of the wording in an insurance
policy. The standard conditions or terms provide for the insured complying with the terms of
the policy and telling underwriters promptly about any changes to the risk.
What are the types of condition
- condition precedent to contract; and
- condition precedent to liability.
Precedent
The word ‘precedent’ in this context means that the condition must be satisfied for either the
contract to exist or for the insurer to have any liability under the contract.
Therefore, it can be seen that a breach of these conditions by the insured could have a
catastrophic effect on the insurance or any claim that they might have
condition precedent to contract
A condition precedent to contract would include the requirement to have an insurable
interest. For non-marine insurance, insurable interest is required at the point of purchasing
the insurance as well as the point of the claim. If no insurable interest exists at the point of
purchase, the insurance contract is not valid
condition precedent to liability.
In many commercial insurance contracts, there are very specific claims notification clauses
and many of these are stated to be conditions precedent to liability. The wording will be
along the lines of ‘It is a condition precedent to liability that all claims are notified within
x days’. Should this provision not be complied with, the insurer could refuse the claim
(although the policy itself remains in force).
From a legal standpoint, the condition does not have to be stated to be a condition precedent
to liability for the court to interpret it as one. It is also true that calling it one does not
necessarily make it so
Intention and effect
legal term in policies for policy wording
Exclusion
A risk an insurer will not cover under their policy. Some risks like radioactive waste are policy exclusion
Individual policy exclusion
some exclusions only on individual policies so additional coverage is purchased from specialist insurers
Warranties
promises made by the insured relating either to facts or to performance
concerning the risk. Essentially a warranty is the insured saying that:
* something will or will not be done; or
* a certain fact exists or does not exist.
Warranties are used by insurers for those elements which they consider most
important about a risk and they carry the heaviest penalties if breached. Examples of
warranties include:
* For a property risk – a warranty that there is a fully operational sprinkler system.
* For an aviation risk – a warranty that only personnel with a certain number of flying
hours will operate the equipment.
* For a marine risk – a warranty that the vessel will not trade in certain areas of the world
Warranties in policies
Most warranties have to be written clearly in the policy (i.e. they are express warranties) but
in marine insurance implied warranties apply if the policy is subject to English law. Implied
warranties do not have to be written into the policy; therefore, it is important that the insured
is advised about them given the penalties for breach
Suspensive conditions
Under the Insurance Act 2015, if there is a breach of warranty the policy is suspended until
the breach is remedied and the suspension lifts automatically.
The insurer has no liability under the contract for any loss which occurs or is attributable to
something which takes place during that time of suspension.
Link between breach and loss
Historically there did not need to be a link between a breach of warranty and a loss for an
insurer to be discharged from liability under a policy.
Basis of Contract Clause
As under the Consumer Insurance (Disclosure and Representations) Act 2012, the
Insurance Act 2015 removes the insurer’s ability to use basis of contract clauses to convert
representations made at the time of placement into warranties.
Additionally, whereas all of the other provisions of the Act can be contracted out of so
that the parties involved agree that they will not apply, it is not possible to contract out of
this provision
Sources of Wordings and Clauses
The codes applied to clauses often indicate the origin of the wording and follow
these conventions:
* LSW – London Standard Wording;
* ISO – International Standards Organisation;
* LMA – Lloyd’s Market Association;
* NMA – Non-Marine Association (now part of LMA); and
* AVN – Aviation Market.
Standard wordings are freely changeable within the context of any individual contract as they
are treated as a starting point for specific negotiations. The parties that create wordings and
clauses and make them available make sure this is clearly stated.
Other market policy forms
insurers operating in the London Market choose to use another market’s
policy wordings, as that other market has in fact led the risk, or is writing the primary layer
when London is providing the excess layer coverage. There are a number of wordings by
which the London Market insurers try to ensure that key elements are covered, and for
primary and excess placement, try to make sure that they are on the same terms.
