Chapter 2 - Basic Insurance legal principles and terminology Flashcards Preview

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Flashcards in Chapter 2 - Basic Insurance legal principles and terminology Deck (67)
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Contract Law

A law of deals or agreements

“An agreement enforceable by law between two or more persons to do, or abstain from doing, some acts, their intention being to create legal relations and not merely to exchange mutual promises.”

An agreement between insured and insurer


Main purpose of insurance

Pay claims to policyholders should they suffer loss or damage

Restores the insured to the position they were in before the loss (indemnifying the insured)


What are the two most important essentials of a valid contract?

- Offer and acceptance
- Consideration


Name three of the six other important elements of a valid contract

- Intention to create a legal agreement
- Possibility of performance
- Capacity to enter into legal relations
- Consensus ad idum (meeting of minds)
- Legality
- Certainty


Legal term for a contract which may be declared invalid if missing essentials of a valid contract

Void ab initio
(From the beginning)


Simple contract

Insurance policies are simple contracts
A simple contract does not need to be evidenced in writing
A policy does not have to have been issued for cover to exist
Good practice to have evidence of the agreement - in London Market called Contract Certainty


Contract Certainty in LM

Requires all parties to know terms

Evidence in form of a slip (Market Reform Contract) or Broker Insurance Document


When does a contract come into existence?

When one party makes and offer, and the other accepts unconditionally


Unconditional acceptance

Accepting an offer without altering any of the terms.

Must be the final and unqualified agreement to the offer


Conditional acceptance

Introducing new terms (a counter-offer)


Postal acceptance

Acceptance complete when the letter of acceptance is posted



Each persons side of the bargain which supports the contract

Consideration from the insured = Payment of premium

Consideration from the insurer = Promise to pay valid claims


Insurable interest

“The legal right to insure arising out of a financial relationship recognised at law, between the insured and the subject-matter of insurance.”


What are the 3 features of insurable interest?

- Subject-matter
- Need for a legal relationship
- Financial value


What might an insurer do about their own insurable interest?

Purchase reinsurance to protect them from the risks they have written


When must insurable interest exist for the following:
Life assurance
General insurance

Life assurance - Inception, but not at time of loss
Marine - Time of loss, not necessary at inception
General insurance - Inception & time of loss


Insurable interest in Common Law

We have a duty of care
Law of negligence
Insurable interest such as ownership/exposure to liabilities to others.


Insurable interest- Statutes that impose a positive duty

- Settled Land Act 1925
- Repair of Benefice Buildings Measure Act 2972 (makes tenants responsible for upkeep)


Statutes modifying insurable interest

- Carriage of Goods by Sea 1971: limits liability of a carrier

- Hotel Proprietor’s Act 1956: liability only if a room has been damaged by a guest

- Carrier’s Act 1830: no liability for goods such as jewellery worth more than £10 unless value declared


Good Faith

All parties to a contract must act with good faith - they must not mislead one another.


Good faith in pre-contract negotiations

Both parties should be open and transparent

Share key information

Proposer has duty to disclose all material facts

Insurer must be open and cannot introduce new non standard terms or withhold discounts for improving a risk


What is a consumer?

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


Consumer Insurance (Disclosure and Representation) Act 2012

The consumer has a duty to take reasonable care not to make a misrepresentation to their insurers and need to exercise reasonable care


Two types of misrepresentation



Misrepresentation is deliberate/reckless if...

The consumer knew it was untrue or misleading or did not care

The consumer knew it was relevant to the insurer or did not care


Insurers remedies for misrepresentation when deliberate/reckless

- Avoidance of contract
- refusing all claims
- no return of premium unless it would be unfair


Insurers remedies for misrepresentation when careless and claims involved

If would not have insured - avoid contract and return premium

If would have insured but on diff terms - treated as if taken out on those terms

If would have insured at higher premium - reduce proportionately amounts to be paid on claim


Insurers remedies for misrepresentation when no claims involved

If would not have insured - avoid contract and return premium

If would have insured but on diff terms - treated as if taken out on those terms

Insurer can terminate or change terms (with notice given)

Insured can terminate


ICOBS - claims handling section

Insurers must not unreasonably reject a claim. Unless evidence of fraud.

Unreasonable grounds:

Non-disclosure of a material fact which p/h could not reasonably be expected to have disclosed

Non-negligent misrepresentation of a material fact


Insurance Act 2015
(Legal position of the insured is not a consumer)

The insured must make a fair presentation of the risk to the insurer