IF2 - Module 10

Question 1

The basic structure of most general insurance policies includes:

Answer 1

They include the following sections:

• Heading
• Recital clause
• Signature
• Operative clauses
• Exclusions
• Conditions
• Policy schedule
• Information and facilities

Question 2

The heading of a policy typically includes?

Answer 2

The name of the insurer and sometimes the address and company logo

Question 3

The recital clause typically includes?

Answer 3

This states the basis on which the contract is formed, referring to the two parties, insured and insurer coming together to form a contract whereby the insured will pay a premium in return for which the insurer will indemnify the insured.

Question 4

The signature typically includes?

Answer 4

The pre-printed signature of an official from the insurer.

Question 5

The operative clauses typically include?

Answer 5

The heart of the policy, specifying in detail what is covered.

There may in fact be several clauses, each dealing with a different aspect of the insurance.

Question 6

The exclusions typically include?

Answer 6

The exceptions, limitations or general exclusions that apply to the entire contract

Question 7

The conditions typically include?

Answer 7

All policies have certain conditions attached to them. Some are implied by common law and do not need to appear in the policy to apply, others are express conditions, specifically mentioned in this section of the policy.

Question 8

The policy schedule typically includes?

Answer 8

Until this point, everything in the policy is pre-printed or standardised and applies to all those insured by the same policy. The schedule is the place where the policy is made personal and specific to the individual insured. It contains the variable details of the policy such as the insured’s name and address, the policy period, premium, details of what is insured (the subject-matter), the sum insured or limit of liability, territorial limits, policy number, reference to special exclusions, conditions or aspects of cover and the operative sections of the policy.

Question 9

The information and facilities section typically includes?

Answer 9

The definitions of words used in the policy document, customer services standards, complaints procedures, claims information and privacy regarding customer information.

Question 10

Exclusions can be…

Answer 10

specific - specific exclusions relate to that part of the policy

general - general exclusions apply to the whole policy. Some general exclusions are common to all insurance and are termed ‘market exclusions’.

Question 11

What are the market exclusions in insurance?

Answer 11

The market exclusions are:

• War and related perils
• Riot and civil commotion
• Radioactive contamination and explosive nuclear assemblies
• Terrorism
• Pollution and/or contamination
• Marine policies
• Contractual liability
• Sonic bangs

Question 12

General insurance policies also contain several conditions. These are..

Answer 12

Duties of the insured

Alteration

Action by the insured in the event of a claim

Fraud

Reasonable precautions

Contribution

Average

Subrogation

Arbitration

Cancellation

Question 13

What does the duties of the insured condition state?

Answer 13

This states that the insured must observe and fulfil the terms of the policy.

Question 14

What the alteration condition mean?

Answer 14

The insured must notify the insurer of any changes that increase the risk. This makes the duty of disclosure a continuing one throughout the duration of the policy.

Question 15

What does the actions by the insured in the event of a claim condition cover?

Answer 15

The procedures that must be followed by the insured in the event of a claim are set out here, including the notification process.

Question 16

What does the fraud condition cover?

Answer 16

In the event of any fraudulent, false or exaggerated claim the policy may be cancelled, the claim may be rejected (along with any subsequent claim) and the insurer may retain any premiums paid by the insured.

Question 17

What does the reasonable precautions condition cover?

Answer 17

The insured must take all reasonable precautions to minimise the risk of loss or damage or of incurring liability. They should act in the same way as they would if uninsured.

Question 18

What does contribution condition cover?

Answer 18

In the event of more than one policy of indemnity covering the same risk, the insurer limits its liability to its share of the loss. The insured is usually obliged to claim proportionately from each insurer.

Question 19

What does the condition of average cover?

Answer 19

If the policyholder has ‘under-insured’ - i.e. declared a value for the risk that is less than the full value - thus paying less than the appropriate premium - the insurer reserves the right to pay only a rateable proportion of any claim, in line with the amount of under-insurance.

Question 20

What does the condition of subrogation cover?

Answer 20

At common law, the insurer has the right to take over the insured’s rights, following a loss and payment of a claim, to recover the loss from the party responsible. The policy condition allows the insurer to start to pursue recovery rights before payment of the loss (although the actual recovery of money must take place afterwards).

Question 21

What does the condition of arbitration cover?

Answer 21

This states that any disputes regarding the amount to be paid in settlement of a claim will be judged by an independent arbitrator.

Question 22

What does the condition of cancellation cover?

Answer 22

This sets out the terms for cancellation of the contract, by either party, although insurers rarely in practice cancel a contract mid-term, even if they have had a bad claims experience.

Both insurer and insured have the right to cancel and, in either case, it is stated that the insured may receive a refund of part of the premium paid. If the insurer exercises its right to cancel by giving the seven days’ notice required, it is universal practice to refund a pro rata amount to reflect the unexpired time.

Due to the Deregulation Act 2015, it is no longer a requirement to return the certificate of insurance when a motor policy is cancelled.

Question 23

What are the two types of a breach of condition?

Answer 23

• Conditions precedent to the contract
• Conditions precedent to the liability

Question 24

What is a condition precedent to the contract?

Answer 24

Conditions precedent to the contract are those that must be fulfilled before the contract can be completed. Failure to comply will in some cases render the policy ‘void’ (of no effect).

Question 25

What is a condition precedent to liability?

Answer 25

Conditions precedent to liability are those that must be complied with if a claim is to be regarded as valid. Failure to meet one of these conditions may entitle the insurer to avoid liability for a certain loss, but not to avoid the whole policy.

Question 26

What is a warranty?

Answer 26

A warranty is basically a promise by the insured that:

• something will be done - e.g. rubbish will be swept up from the factory floor every day;
• something will not be done - e.g. no inflammable materials will be stored in the factory;
• a certain fact exists - e.g. a warehouse containing cigarettes is protected by an intruder alarm;
• or a certain fact does not exist - e.g. no welding is carried out on the premises

A breach of warranty discharges the insurer from liability under the policy as from the data of the breach.

Question 27

How does failure to comply with a warranty affect a claim?

Answer 27

A warranty must be complied with exactly. If it is broken and this is relevant to a loss, cover terminates.

However, following the introduction of the Insurance Act 2015, the FCA rule that an insurer will not repudiate liability for a loss under a consumer contract for a breach of warranty where the breach is unrelated to the loss, now applies to all policyholders.

In addition, the Act states that breach of warranty suspends but does not terminate cover. An insurer is not liable for losses occurring while the insured is in breach of a warranty, but liability is restored once the breach is remedied. Note that except for marine insurance (where it is ‘implied’ that the vessel is seaworthy), all warranties are ‘expressly’ stated in the policy.

Question 28

What does the Consumer Insurance (Disclosure and Representations) Act 2012 state?

Answer 28

For consumers, FCA rules and the Consumer Insurance (Disclosure and Representations) Act 2012 require that an insurer will not, except where there is evidence of fraud, refuse to meet a claim on the grounds of:

• non-disclosure of a material circumstance that they could not reasonably be expected to disclose; or
• misrepresentation of a material circumstance unless the misrepresentation is negligent.

Question 29

Under the Consumer Insurance (Disclosure and Representations) Act how can an insurer remedy a misrepresenation?

Answer 29

For an honest and reasonable misrepresentation, the insurer must pay the claim.

For a careless misrepresentation, the insurer will have a compensatory remedy based upon what the insurer would have done had the consumer taken care to answer the question accurately.

For a deliberate or reckless misrepresentation, the insurer may treat the policy as if it never existed and decline all claims.

Question 30

For commercial customers, the Insurance Act 2015 (IA) creates a duty to make a fair presentation of the risk to insurers. What are the proportionate remedies and insurer can pursue if this is not the case?

Answer 30

In other cases, the insurer has a proportionate remedy depending on the circumstances:

• if the insurer would not have entered into the contract at all they can avoid it and refuse all claims after the date of the breach, but they must return the premium;
• if the insurer would have entered into the contract, but on different terms (not related to the premium), then the contract will be treated as if those terms applied;
• or if the insurer would have entered into the contract, but charged a higher premium, then claims after the date of the breach can be reduced proportionately.

Question 31

What is an excess?

Answer 31

An excess is the first amount of each and every claim which is not covered by the policy. The excess may be:

compulsory, i.e. imposed by the insurer;

or voluntary, i.e. accepted by the insured in return for a premium discount.

Question 32

What is a deductible?

Answer 32

A very large excess under a commercial insurance is often called a deductible.

Question 33

What is franchise?

Answer 33

A franchise is a threshold used to decide whether any claim payment is made. No payment is made for any claim falling below the franchise; however, claims that exceed the franchise are paid in full.
Time franchises are common with sickness cover under personal accident and sickness insurance policies.

Question 34

What are the rules for insurers and intermediaries in respect of policy renewals?

Answer 34

Rules

For renewals between 1 and 3 years of inception the notice should include:

• the renewal premium;
• last year’s premium;
• the total premium;
• and a statement that the customer should check cover is appropriate and that they can compare prices and levels of cover offered by other providers.

After 4 or more years of inception the notice should include:

• as above; plus
• a statement that the customer has been with the provider for a number of years and may be able to get a better price if they shop around.

In addition, insurers are now required to offer renewing customers a price that is no higher than they would pay as a new customer and give most consumers easier methods of cancelling the automatic renewal of their policy.

Question 35

What is the process for renewing policies?

Answer 35

If the insured wishes to renew, they will pay the renewal premium - normally by cheque or credit card for single premium payments and direct debit or standing order where paying by instalments.

For all classes, the insurer must send out confirmation of renewal promptly, together with any certificate or other documentation which may be appropriate to the class of insurance.

Contract certainty principles and guidance agreed by the market require that the correct documentation must be provided no later than seven working days (for consumers) or 30 calendar days (for all other categories) beyond renewal.