IF1 Module 3 and 4

Question 1

What is a contract?

Answer 1

A contract is an agreement, enforceable by law, between two or more persons to do (or not to do) something and where there is the intent to create a legal relationship not to merely exchange mutual promises.

Question 2

What would become of an insurance contract in the following scenario?

James deliberately tells his insurer he has no previous driving convictions when, in fact, he served a five year sentence for drink-driving.

Answer 2

A policy may be ‘void ab initio’ (void at the outset) if the policyholder deliberately fails to disclose or misrepresents material information.

Question 3

What would become of an insurance contract in the following scenario?

Despite it being a condition of her policy that Louise keeps her car in her garage overnight, she tends to leave it parked on the street outside her house.

Answer 3

Where a policyholder breaches a policy condition, the policy is voidable, meaning that the insurer can chose to set it aside.

Question 4

Under the Insurance Act 2015, if a fraudulent claim is made, the insurer is:

Answer 4

• not liable to pay the claim
• can recover any amounts already paid for the claim
• can choose to terminate the contract from the date of the fraudulent act

If the insurer chooses to terminate the contract, it:

• can refuse to pay for any losses occurring after the date of the fraudulent act
• does not have to return any premiums

Question 5

To ensure that a valid and enforceable contract is formed an agreement must contain:

Answer 5

• An offer and an acceptance
• A consideration

The consideration can be described as each persons side of the bargain that supports the contract. It can be a promise to do something or refrain from doing something, or it can be a transfer of money, goods, or other property.

For example, in a contract for the sale of a car, the buyer gives the seller money in exchange for the car, and the seller gives the buyer the car. The money is the consideration given by the buyer, and the car is the consideration given by the seller.

Question 6

What is an agent in law?

Answer 6

An agent is someone who is authorised by a principal to bring that principal into a contractual relationship with a third party.

For example, a travel agent may act as a principle for a travel insurer if the travel agent sells insurance alongside it’s holidays because the travel agent isn’t the one providing the insurance.

Question 7

What is ratification in principal agent relationship?

Answer 7

Ratification refers to a situation where an agent acts without authority, but the principal accepts the act as having been done by the agent on their behalf.
Where this occurs the principal must ratify the whole contract and is not able to vary the terms or pick and choose which elements to accept.

For example, let’s say Tom knows that Mike wants to sell his car. Dave expresses an interest in the car and Tom agrees to sell it to him on Mike’s behalf, even though he has no authority to do so.

Tom is unable to contact Mike before agreeing the sale because Mike is away on holiday, but on his return Mike parts with the car for the agreed amount.

In this example the agency relationship between Tom and Mike is created by ratification because Mike ‘ratifies’ Tom’s actions by selling the car to Dave for the agreed amount on his return.

Question 8

What are the three ways in which an agent-principal relationship can be created?

Answer 8

• Consent
• Necessity
• Ratification

Question 9

What is an undisclosed principal?

Answer 9

In contract law, an “undisclosed principal” is a person who uses an agent for negotiations with a third party who has no knowledge of the identity of the agent’s principal.
The other party is only aware that they are dealing with the agent, and not the principal.

For example, if a company hires a salesperson to negotiate a contract with a supplier, and the supplier is only aware of the salesperson and not the company, the company would be considered an undisclosed principal.

Question 10

What is a Term of Business Agreement (TOBA) ?

Answer 10

The relationship between an insurance intermediary and an insurer is defined in a formal TOBA.

Question 11

How is an agency relationship established via consent?

Answer 11

This is the most common way of establishing an agency relationship and in these cases both the agent and the principal consent to enter in a legally enforceable agreement.

In these cases the insurer would issue a Terms of Business Agreement stating the terms of the relationship and the extent of their authority. This is known as an express appointment.

It is also possible for an agency to be created by implied consent.

Question 12

How can an agency relationship be established by necessity?

Answer 12

It is created when a person is entrusted with another’s property and it becomes necessary to do something to preserve that property although he has no express authority to do so.

Question 13

What is an unconditional acceptance?

Answer 13

An unconditional acceptance is the final and unqualified agreement to an offer.

Question 14

What is a conditional acceptance?

Answer 14

This is when you agree to the original offer but only with some changes. This is also known as a counter offer.

Question 15

When is a contract made with regards to postal acceptance?

Answer 15

Acceptance is complete at the point when the letter of acceptance is posted.

Question 16

What are the duties of an agent to their prinicipal?

Answer 16

An agent has the following duties to their principal:

• Obedience
• Personal performance
• Due care and skill
• Good faith
• Accountability

Question 17

What are the duties of a principal to an agent?

Answer 17

• Renumeration
• Indemnity

Question 18

What is actual authority?

Answer 18

Actual authority allows a third party to act on behalf of, and engage in decision-making for a company or agency. Actual authority may be express or implied.

Question 19

What is express authority?

Answer 19

Express authority is an agent’s power to act on behalf of a principal, expressly granted by the principal.

Express authority may be oral or in writing. As it would be unusual for this to be oral in an insurance context; all terms would be expressed in a TOBA.

Question 20

What is implied authority?

Answer 20

Implied authority is based on the agent’s reasonable understanding of the principal’s instructions.
If the agent has to undertake a certain action in order to carry out express instructions, they will have implied authority to do so.

Question 21

What is apparent authority?

Answer 21

The condition that arises if a third party believes that an agent has the authority to act for another person or company (called the principal) when that authority has not in reality been granted. If an agent acts with apparent authority, the agent’s acts legally bind the principal.

For example, a customer may believe that an employee who presents a contract on company stationery is authorized to sign that contract on behalf of the company. Even if the employee does not have the authority to enter into contracts, the company will be legally bound by the signed agreement.

Question 22

What are the three most common ways by which agency is terminated?

Answer 22

• Mutual agreement by the principal and the agent
• The agency being withdrawn by the principal or given up by the agent
• The death, bankruptcy or insanity of either party

Question 23

What are insurer right’s with regards to cancellations?

Answer 23

Most general insurance policies have a cancellation condition. This allows the insurer to cancel, provided that a letter is sent to the insured’s last known address, giving 14 days notice.

If the insurer does this they would send a pro rata return premium for the rest of the period uncovered.

Question 24

What is a policyholders’ rights with regards to cancellation?

Answer 24

When a consumer exercises the right to cancel they may only be required to pay for the service actually provided.

Question 25

Other means of terminating contracts of insurance?

Answer 25

• Fulfillment
• Voidable contracts
• Breach of warranty
• Fraudulent acts

Question 26

What does fulfillment mean with regards to terminations?

Answer 26

This would typically mean the total loss of the subject matter. For example, if a car insured under a private car policy is burnt out so that it effectively ceases to exist, the policy is automatically terminated.

Question 27

What do voidable contracts mean in regards to terminations?

Question 28

What is a breach of warranty with regards to terminations?

Question 29

What are fraudulent acts with regards to terminations?

Question 30

What is insurable interest?

Answer 30

Insurable interest is the legally recognized relationship between the insured and the object or liability being insured.
Insurable interest must be present for a person to be able to insure something or someone.

Question 31

What are the main features of insurable interest:

Answer 31

• subject-matter
• legal relationship between the insured and the subject matter
• financial value of the subject matter

Question 32

What are the three ways in which insurable interest in a subject matter can be created?

Answer 32

• Common law
• Contract
• Statute

Question 33

What is the principle of good faith?

Answer 33

The principle of good faith means that disclosure must be made in a reasonable, clear and accessible matter, and material representations of fact, expectation or belief must be substantially correct.

Question 34

What is a material circumstance?

Answer 34

Material circumstances are those which would be likely to influence the underwriter’s decision about the proposal at outset, at renewal or during an alteration.

Question 35

What circumstances do not need to be disclosed to an insurer?

Answer 35

• Information the insurer ought to know
• Information the insurer is presumed to know
• Information waived by the insurer
• Spent convictions

Question 36

What are the four points over the duration of a contract where material information needs to be disclosed.

Answer 36

• Inception
• Alteration
• Renewal
• Continuing requirement

Question 37

For a life insurance policy, when does the insured need to take reasonable care to ensure that the information given to insurers is not misleading?

Answer 37

At the proposal stage only

Question 38

What remedies can an insurer take if there is a careless ‘qualifying misrepresentation’ ?

Answer 38

• If the insurer would not have entered into the contract it can avoid the policy but must return the premium
• If the insurer would have entered the contract on different terms it can treat the contract as if those terms had applied
• if the insurer would have entered into the contract but charged a higher premium, the claim amount can be reduced disproportionately.

Question 39

What remedies can an insurer take if there is a deliberate or reckless ‘qualifying misrepresentation’ ?

Answer 39

The insurer can treat the policy as if it never existed, can deny all claims and retain any premiums paid.

Question 40

What is the formula for how much a claim can be reduced proportionally if there is a misrepresentation leading to the insurer charging a lesser premium?

Answer 40

x = premium actually charged / higher premium * 100

For example, Jane mistakenly believed her driving convictions were spent and did not disclose them. Had she done so, her premium would have been £800, rather than £600. Her car is damaged and the cost of repairs comes to £400. £600/£800 x 100 = 75%. Her insurer therefore only has to pay 75% of the £400 claim, i.e. £300.

Question 41

The Consumer Insurance [Disclosure and Representations] Act 2012 requires:

Answer 41

• consumers to take reasonable care not to make a misrepresentation
• consumers to take reasonable care to answer the insurer’s questions fully and accurately
• insurer’s to ensure they ask for any information (material facts) they need to assess the risk being insured