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LM1 DB > Chapter 2 - Basic insurance legal principles and terminology > Flashcards

Chapter 2 - Basic insurance legal principles and terminology Flashcards

1
Q

What is an insurance contract?

A

An agreement enforceable by law, between an insured and insurer

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2
Q

What makes a valid contract?

A

Offer and acceptance

Consideration

Intention to create a legal agreement

Capacity to enter (>18)

Meeting of minds - do both parties believe they are agreeing to the same thing

Certainty - terms are clear

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3
Q

What is the legal term for an invalid contract?

A

Void ab initio (from the beginning)

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4
Q

All parties to a contract must act in?

A

Good faith - must not mislead one another

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5
Q

How is insurance cover evidenced in the London Market?

A

Contract certainty - all parties know terms before inception and evidence provided within 30 days

MRC - slip

Broker Insurance Document - broker creates

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6
Q

What is unconditional acceptance?

A

“I accept”

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7
Q

What is conditional acceptance?

A

“I accept as long as I can have”

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8
Q

What is postal acceptance?

A

Parties have agreed to use post

Acceptance is granted once letter of acceptance is POSTED

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9
Q

What is consideration?

A

Each person’s side of the bargain which supports the contract

Legally defined by Currie vs Misa 1875

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10
Q

What is the consideration from the insured?

A

Paying the premium

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11
Q

What is the consideration from the insurer?

A

Promise to pay valid claims

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12
Q

What is insurable interest?

A

Legal right to insure

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13
Q

What are the features of insurable interest?

A

Subject- matter

Legal relationship

Financial value

Insurer’s own insurable interest - purchase reinsurance

Timing of insurable interest

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14
Q

When must insurable interest exist in life insurance contracts?

A

Must exist at inception, not at the time of loss

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15
Q

When must insurable interest exist in marine insurance contracts?

A

Must exist at the time of loss

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16
Q

When must insurable interest exist in general insurance contracts?

A

Must exist at both inception and time of loss

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17
Q

How can insurable interest arise?

A

Common law

Contract - greater liabilities than common law

Statue - impose a positive duty e.g., Repair of Benefice Buildings Measures Act 1972 - responsible for upkeep of buildings

Statues modifying insurable interest - restrict liability e.g., Hotel’s Proprietors’ Act 1956 - hotel liability if room not booked

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18
Q

Does the principle of good faith apply equally to the proposer and insurer in pre-contract negotiations?

A

Yes

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19
Q

Who has the duty to disclose all material facts about the risk in pre-contract neogitations?

A

Proposer

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20
Q

What can’t the insurer do in pre-contract negotiations?

A

Introduce non-standard terms into the contract that were not discussed during negotiations

Withhold available discounts to improve as risk

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21
Q

What is a consumer?

A

Someone who is buying insurance for purposes unrelated to their business, trade or profession

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22
Q

What duty does a consumer have under the Consumer Insurance (Disclosure and Representations) Act 2012?

A

Take reasonable care not to make a misrepresentation to their insurers

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23
Q

What are two misrepresentations under the Consumer Insurance (Disclosure and Representations) Act 2012?

A

Careless

Deliberate or reckless

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24
Q

What makes misrepresentation under the Consumer Insurance (Disclosure and Representations) Act 2012 deliberate or reckless?

A

Knew/didn’t care it was untrue or misleading or didn’t care

Knew/didn’t care that the matter was relevant to the insurer

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25
Q

What can an insurer do if they can prove a deliberate or reckless consumer?

A

Avoidance of contract

Refuse all claims

Don’t need to return premium unless unfair to consumer to retain them

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26
Q

What can an insurer do if they can prove a carless consumer?

A

Depends on what they would have done without the representation

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27
Q

What can an insurer do if claims are involved with a deliberate, reckless or careless consumer?

A

If they wouldn’t have entered into the contract they may avoid the contract and return the premium

If they would have entered the contract but on different terms, then contract treated using the different terms

If they would have entered the contract but with a higher premium, then insurer reduces amounts to be paid on a claim

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28
Q

What can an insurer do if claims are not involved with a deliberate, reckless or careless consumer?

A

If they wouldn’t have entered into the contract they may avoid the contract and return the premium

If they would have entered the contract but on different terms, then contract treated using the different terms

Give notice and terminate the contract - insured or insurer

Premiums must be repaid

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29
Q

Where does it define what would be considered ‘unreasonable’ for rejecting a claim from consumers?

A

Insurance: Conduct of Business Requirements (ICOBS)

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30
Q

What act contains the law on disclosure and representations for non-consumer insureds?

A

Insurance Act 2015

Disclose every material circumstance which the insured knows or ought to know for the insurer to make enquiries

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31
Q

What concept is contained in the Marine Insurance Act 1906?

A

Materiality

Every circumstance is material which would influence the judgement of an insurer fixing the premium on a risk

32
Q

What are two types of material information to insurers?

A

Physical hazard - e.g., info about the construction of a building and heating system

Moral hazard - e.g., insured has any criminal convictions, insurances previously declined

33
Q

What are the key changes within the Marine Insurance Act 1906?

A

Cannot dump info on each other - insurer and insured

Insurer to ask relevant questions

34
Q

Examples of information that do not need to be disclosed during contract negotiation?

A

Matters of law

Public knowledge

Factors that lessen the risk

Information waived by insurers

Information that a survey would’ve revealed

Information that an insurer does not need to know but varies depending on whether it was relevant or material

35
Q

The insurer ‘ought to know’ something if…

A

It is known by an employee or agent or insured

36
Q

The insurer is ‘presumed to know’…

A

Things which are common knowledge and things in their class of business

37
Q

What does estoppel mean?

A

Legal term used for a bar that precludes a person from asserting a fact or a right

38
Q

Is the notice of cancellation for insurers stand?

A

No

39
Q

What are the two ways in which war cancellations operate?

A

If cancelled in short notice, immediate reactivation allowing insurers to increase premiums if insured is going to high risk waters

If war breaks out between certain countries

40
Q

Do policyholders have a right to cancel?

A

Yes but usually at a cost for insurers processing costs

41
Q

What does fulfilment mean?

A

Contract has fully performed e.g., all claims in claims limit have been paid out

42
Q

How can a policy be voidable?

A

No insurable interest

43
Q

What is the proximate cause?

A

Dominant cause when there is a chain of events that cause a loss

Direct link between cause and loss

44
Q

What are the three classifications of perils when checking whether the peril is covered by the policy?

A

Insured perils - those named in the policy

Expected or excluded perils - in policy as specifically not covered

Uninsured or unnamed perils - not in policy at all

45
Q

What happens to a claim if there is >1 peril that caused damage?

A

Impossible to allocate the damage to different perils so comes down to whether a peril is/isn’t included

46
Q

What happens to a claim if one peril is excluded from the policy?

A

Nothing paid at all

47
Q

What happens to a claim if one peril is not included/mentioned from a policy?

A

Whole claim is paid

48
Q

What is the definition of indemnity?

A

Financial compensation sufficient to place the insured in the same financial position after a loss as they enjoyed immediately before the loss occurred

Insured is not to make a profit

49
Q

What is a short-term benefit policy?

A

Provide fixed benefits e.g., accident and sickness

50
Q

Are short-term benefit policies policies of indemnity?

A

No

No price on loss of sight for example so no financial compensation is enough

51
Q

What are some examples of benefit policies?

A

Personal accident

Loss of licence for air crew

Life insurance

Pension

52
Q

What are indemnity settlement options available to insurers?

A

Cash

Repair

Reinstatement

Replacement

53
Q

When is a cash payment used as an indemnity settlement option by insurers?

A

Mainly for commercial insurances

e.g., business interruption, liability policies

54
Q

When is repair used as an indemnity settlement option by insurers?

A

Motor policies

Cheaper than if insured might achieve - larger organisation

55
Q

When is replacement used as an indemnity settlement option by insurers?

A

Glass insurance

Speedy way to reduce further losses

56
Q

When is reinstatement used as an indemnity settlement option by insurers?

A

Restore a building that has been damaged by a peril

Limited by sum insured so not preferred - can’t get to max pay out then stop works

57
Q

Is property insurance a contract of indemnity?

A

Yes

‘New for old’

Replacement cost minus wear and tear

58
Q

Is liability insurance a contract of indemnity?

A

Yes

Legal liability to pay damages and legal costs

Policies detail what is included

59
Q

How do marine insurers measure indemnity?

A

Valued policy aka agreed value policy

Insurable value is agreed between the insured and insurer

60
Q

How do property insurers measure indemnity?

A

Based on its value at the date and place of loss

61
Q

What is betterment in basic building cover?

A

Insurers make allowances for anything that cannot be repaired as it was before and replacement has to be new

61
Q

What are reinstatement conditions in property insurance?

A

Full value at the time of a loss (no wear and tear deduction)

62
Q

What is the reinstatement memorandum clause in property insurance?

A

Sum insured must represent the full value at the time of reinstatement

Insured pays a premium based on the higher amount

63
Q

What is the day one reinstatement clause in property insurance?

A

Insured to state reinstatement amount on the first day of cover

64
Q

What is the starting point for the measurement of indemnity in machinery and contents?

A

Basic cover - is there a ready second hand market for the item?

If there is - second hand price and cost of transportation and installation

If there isn’t - cost of repair and replacement less any wear and tear

65
Q

What is a first loss policy?

A

Might be >1 hazard on a risk but sum insured is only for 1 hazard

If full value isn’t really a risk

66
Q

What are the limiting factors of indemnity?

A

Sum insured - max amount to be recovered, not always stated in policies

Inner or item limits - limits within the overall sum insured, can be against different perils

Average - losses paid in proportion to what the insured has decided to set as a sum insured

Excess - amount that is deducted from each claim and paid by the insured

Deductible - large excess

Franchise - excess lifted if the claim value exceeds the franchise value - insurers pay the whole claim

67
Q

What is contribution and does it support the principle of indemnity?

A

When an insured has more that one policy covering a particular loss or liability so insurer calls upon other insurer to share the cost of indemnity in a rateable manner

Dual insurance

Yes

68
Q

How does contribution arise?

A

Common subject-matter

Common insurable interest

Common perils

Both policies are liable for loss

Neither policy contains a non-contribution clause

69
Q

What is rateable proportion?

A

Share of any claim an insurer pays

70
Q

How is rateable proportion calculated?

A

By sum insured - (policy sum / total sum) * loss

By independent liability - amount payable calculated under each policy and loss shared in proportion to independent liability (independent liability under this policy / total of independent liabilities under all policies) * loss

71
Q

When is contribution modified?

A

Non-contribution clauses - if >1 policy has this, then cancels out and insurer would contribute its only rateable proportion

More specific insurance clauses - insuring jewellery, >1 insurer does not need to contribute

Market agreements - Association of British Insurers (ABI) - insured does not need to claim from each policy if modest

72
Q

What is subrogation?

A

Insurers right to claim against a responsible third party having first indemnified the insured

73
Q

What is tort?

A

Breach of duty to act in a reasonable way in common law

e.g., someone crashes into your wall

74
Q

What statue makes provisions for claims that can be made against the police in relation to property damaged, stolen in riots?

A

Riot Compensation Act 2016

43 days to claim and pay

75
Q

What is salvage?

A

Any residual value in the item insured after a loss

i.e., not completely destroyed, repair cost is more than value, so some value still in destroyed item

Insurer has the benefit of

76
Q

When does subrogation not happen?

A

Insured has no rights - ‘mutual hold harmless’ - deal with their own damage, not claim against the other

Benefit polices - can keep both personal accident benefits and court award

Subrogation waiver - prevents insurer from perusing any subrogation rights

LM1 DB (7 decks)

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