Chapter 2 - basic insurance legal principles and terminology

Question 1

How may an insurance contract be defined?

Answer 1

an agreement, enforceable by law, between the insured and insurer

Question 2

What are the essentials of a valid contract?

Answer 2

Offer and acceptance - one party makes an offer and the other accepts unconditionally

consideration - each parties’ side of the bargain which supports the contract (promise to pay premiums and promise to pay out on valid claims)

Intention to create a legal agreement

Possibility of performance - can the agreement actually be done?

capacity to enter into legal relations - e.g. under 18 etc

Consensus ad idem (meeting of minds) - do both parties believe they are agreeing to the same thing?

Legality and certainty

Question 3

What are the features of insurable interest

Answer 3

Subject-matter - what is actually being insured (matter of insurance) and relationship the insured has with the subject matter (matter of contract)

need for a legal relationship, but not necessarily ownership

financial value

insurer’s own insurable interest

timing of the insurable interest

Creation of insurable interest - common law, contract (accepting greater responsibilities), statute (some impose a positive duty such as Settled land act 1925 and repair of benefice buildings measure act 1972 - some also restrict liability such as Carriage of Goods by sea act 1971, hotel proprietors’ act 1956, Carriers’ Act 1830)

Question 4

How does timing of insurable interest change?

Answer 4

Life - must exist at inception but doesn’t have to at time of loss
Marine - must exist at loss but need not during inception
General - must exist at both inception and time of loss

Question 5

what is the principle of good faith?

Answer 5

both parties should be open and transparent with each other in sharing key information relating to the risk

Question 6

How does duty of good faith differ between insured and insurer

Answer 6

Insured has duty to disclose all material facts and know what is material
Insurer cannot introduce new terms that are not discussed or withhold discounts available for certain measures to improve the risk

Question 7

What are the 2 types of misrepresentation that consumers can do under the Consumer Insurance (Disclosure and Representations) Act 2012?

Answer 7

Careless - may lead to voidance of contract and return of premiums, insurer can significantly reduce potential claims pay-out, or change terms of contract
Deliberate or reckless - if the consumer knew it was misleading or untrue, or did not care that it was. Can lead to voidance of contract and insurer refuse any claims but keep premiums

Question 8

What is the definition of fair representation of risk under the Insurance Act 2015

Answer 8

“one which makes disclosure of every material circumstance which the insured knows or ought to know, or disclosure which gives insurers sufficient information to put a prudent insurer on notice that it needs to make further enquiries.

Question 9

What is material information?

Answer 9

Physical hazard info, moral hazard info
Insureds cannot data dump, info must be clear

Question 10

What information does not need to be disclosed?

Answer 10

Matters of law, public knowledge, factors that lessen the risk, information waived by the insurers, info that a survey should have revealed, info that the insured does not know

Question 11

What is the difference between ought to know and presumed to know?

Answer 11

ought to know - something the insurer should know if it is known by an employee or agent of the insurer and should be passed on to the person accepting the risk

presumed to know - things which are common knowledge and what the insurer should reasonably be expected to know

Question 12

What can happen if the misrepresentation was neither reckless or deliberate?

Answer 12

If insurer would not have entered into contract, it can void it but must return premiums
If insurer would have entered but on different terms, then contract will be treated as such on those terms
If insurer would have charged a higher premium, they can do so or reduce claim pay-out on a proportionate basis

Question 13

What is a variation?

Answer 13

something that can occur at any time after original placement, ranging from corrections of spelling mistakes to adding a new asset
Same rules apply to variations if there is a breach of duty of fair representation

Question 14

What is different about compulsory insurances?

Answer 14

e.g. third party motor insurance, exactly the same rules of disclosure apply as to all other non-life contracts, yet insurers must meet all claims for personal injury and property damage, and then enact the right for recovery against the insured.

Question 15

When is disclosure of material information required?

Answer 15

Short-term policies: upon inception and at every renewal as things are expected to change
Long-term - upon inception of the policy

Question 16

What are some examples of how insurers deal with this common law?

Answer 16

Commercial property - requires continuing disclosure of removal of property to another location, or increased risk of damage
Motor insurance - usually a condition that requires continuing disclosure of all material changes to the insured
Public liability - insurers tightly define the business of the insured, meaning the insured must notify any extensions of their activities for cover to apply.

Question 17

How are most risks placed in the London Market?

Answer 17

not with proposal forms, but with a market reform contract (“slip”), where the risk details are summarised for the insurers’ consideration

Question 18

What does Estoppel mean?

Answer 18

Legal term used for a bar of impediment that precludes a person from asserting a fact or right. It usually arises where one party’s conduct has been relied upon by the other. Insurer has to be careful not to lead insured into a false sense of security.

Question 19

What rights do the insurers have?

Answer 19

A cancellation condition provided that a letter is sent to the insured’s last known address with a period of notice ranging from 10 to 30 days, dependent on insurer.

Question 20

When might an insurer cancel a contract?

Answer 20

Difficulty with claims settlement and the insurer feels the insured has acted unreasonably
Some policies provide war coverage which operate in 2 ways:
- to allow cancellation on short notice but with immediate re-activation allowing insurers to increase premiums if subject matter is in high risk areas
- to allow immediate cancellation of policy if war breaks out between 2 of any 5 named countries in the contract.

Question 21

What are the other ways of terminating contracts?

Answer 21

Fulfilment of contract (e.g. paid maximum amount of claims), or some problem in relation to the contract such as deliberate failure to disclose material info

Question 22

when will proximate cause be applied and what is it?

Answer 22

applied when the cause of the loss is not so easily defined, either because there is a chain of events or there is more than a single cause. In such cases, we need rules to guide the way in which insurers should deal with such cases.
Proximate cause is what likely caused the insurable event to occur, e.g. fireworks exploding are the proximate cause of a house burning down.

Question 23

What can perils be classified as?

Answer 23

Insured perils - those named in the policy as covered
Expected/excluded perils - those named as specifically not covered
Uninsured or unnamed perils - those perils not mentioned at all in the policy

Question 24

What is the definition of indemnity?

Answer 24

financial compensation sufficient to place the insured in the same financial position after a loss as they enjoyed immediately before the loss occurred. Life and personal contracts are not contracts of indemnity as they cannot be restored to the same financial value as pre loss. Sort of ‘new for old’

Question 25

What do benefit policies include?

Answer 25

Life, pensions, annuity and investment contracts. Also include personal accident and loss of licence for air crew

Question 26

what are the settlement options which can provide the insured with the necessary indemnity?

Answer 26

Cash - common in all insurance contracts, especially home insurance
Repair - common in vehicle insurance
Reinstatement - insurer agrees to restore a building/equipment that has been damaged. Least common
Replacement - common in glass insurance (shop windows etc), also becoming more used in home insurance

Question 27

What does a liability policy provide?

Answer 27

indemnity to the insured in respect of their legal liability to pay damages and legal costs

Question 28

What is betterment?

Answer 28

when insurers make allowances for anything that cannot be exactly repaired as it was before the loss and where the replacement has to be new

Question 29

What is a reinstatement memorandum clause?

Answer 29

allows a margin of error for estimating the sum insured, stating that the insured value must be at least 85% of the actual value otherwise claims payment will be reduced.

Question 30

What is a day one reinstatement?

Answer 30

requires the insured to state the reinstatement amount on the first day of cover, with insurers providing an automatic uplift for inflation but only charging a modest increase in premiums for this element.

Question 31

What can cover for machinery and contents look like?

Answer 31

Basic cover - where there is a 2nd hand market then it is second hand price plus costs of transport and installation. Where there is no second hand market, cost of repair or replacement less an allowance for wear and tear.

Question 32

How is stock categorised?

Answer 32

Manufacturers’ stock in trade - generally consists of raw materials, WIP and finished stock, cost of raw materials and also labour etc
Wholesalers’ and retailers’ stock in trade - cost of replacing the stock at the time of loss, including transport and handling costs

Question 33

What is an agreed value policy?

Answer 33

the value of the subject matter is agreed at the start of the contract and the sum insured is fixed accordingly, value reviewed at each renewal

Question 34

What is a first loss policy?

Answer 34

When the insured requests that their policy has a sum insured for some perils or even all of them that is less than the full value

Question 35

What are some limitations of policies?

Answer 35

1) Some policies are limited to the sum insured, even if indemnity value is greater
2) Inner limits or item limits - e.g. single item limit of sum insured
3) Average condition - insured is said to be their own insurer for the amount they have chosen not to insure

Question 36

What is the formula for a claim payment?

Answer 36

(Sum insured/value of all goods at risk) X loss

Question 37

What is excess?

Answer 37

an amount that is deducted from each claim which the insured has to pay, usually gives premium reductions if agreed

Question 38

What is deductible?

Answer 38

Historically a large excess, the case when a commercial organisation agrees to meet the cost of any covered claim, up until the stated value of deductible. With a deductible, the insured will never be paid the full policy limits

Question 39

What is a franchise?

Answer 39

The first amount of any claim that the insured must pay, however if the claim value exceeds the franchise value the insurers will pay the whole claim, with the insured having to pay nothing. These are rare

Question 40

What is dual insurance?

Answer 40

When an insured has two policies providing the same cover

Question 41

What is contribution

Answer 41

‘The right of an insurer to call upon others similarly, but not necessarily equally, liable to the same insured to share the cost of an indemnity payment’

Question 42

How does contribution arise?

Answer 42

Common insurable interest - insurable interest the same on both policies
Common peril - peril must be common to both policies
Common subject matter

Question 43

What is rateable proportion?

Answer 43

Share of any claim that an insurer pays when two or more insurers cover the same risk, usually in proportion to sums insured. Alternative calculation is Independent liability, calculates the amount payable under each policy as if no other policy existed and the insurer was alone in indemnifying

Question 44

What are some ways the principle of contribution is modified?

Answer 44

Non-contribution clauses
More specific insurance classes
Market agreements - e.g. insurers will not insist that the insured claims a proportion from each insurer some involved is modest in some markets

Question 45

What is Subrogation?

Answer 45

The right of an insurer following a payment of a claim, to take over the insured’s rights to recover payment from a 3rd party responsible for the loss, not entitled to cover more than they have paid out
Insurers usually include a condition which gives them the power to pursue subrogation rights before a claim is paid.

Question 46

What is tort?

Answer 46

When someone breaches the duty to act in a reasonable way towards others. The person who has suffered is entitled to compensation e.g. someone knocks over your wall in a crash

Question 47

What is salvage?

Answer 47

When there is residual (still some) value in the item insured and the insurer is entitled to salvage value if they meet the loss in full

Question 48

When are insurers not allowed to use subrogation?

Answer 48

Insured has no rights
In benefit policies
Subrogation waiver - insurers agree to waive their rights to subrogation
Negligent fellows employees