#4934 - Introduction To Insurance Law - Insurance Law

Introduction to Insurance Law

Abbreviation Index

• DUGF = Duty of the utmost good faith

• MIA = Marine Insurance Act 1906

• SM = Subject matter

• UWs = Underwriters

• H of L = House of Lords

• Ct = Court

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Core Principles of Insurance

1. A Speculation on a Risk

Parties must define risk very precisely.

1. Fortuity – Must be a fortuitous event.

2. Contract of bona fide / utmost good faith, at least in context of commercial insurance. Incumbent on person wanting insurance to explain all risks to the UW so the UW can decide whether to underwrite.

3. Speculation – Distinguishes insurance from gambling because you must have an interest in what you are insuring. Contracts of pure speculation are gambling. Fact that most insurance is a concept of indemnity supports this – if you have a loss you must have an interest at the time of the event occurring which caused the loss.

2. A Contract

1. UK common law framework/principles apply to insurance contracts subject to England law; i.e. offer/acceptance, certainty, intention to create legal relations etc.

2. Specific rules developed within insurance – I.e. ‘Condition’ is a mere condition and has its own concept of warranty.

3. Private international law–London is massive centre of international risks so many insurance contracts have international dimension. Issues of applicable law/jurisdiction arise. An EEA framework applies there.

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Different Types of Insurance

First party insurance – Where someone insures their own life, house, car etc.

Third party insurance – Where someone insures against their potential liability in law to pay damages to another.

These can be combined in one insurance policy.

Life insurance – Many varieties ranging from whole life insurance, an undertaking to pay a certain sum on the death of the life insured, to endowment policies, whereby the insured receives a sum if he survives beyond a certain age. Death is certain – the uncertainty is as to when it will occur. So this kind of insurance is regarded as contracts for contingency insurance; i.e. contracts to pay an agreed sum of money when the event insured against occurs.

Non-life insurance contracts – These are generally contracts to indemnify the insured only in respect of the loss suffered if it is actually suffered and only to the amount of loss suffered.

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Insurance Definitions

‘Insured’: A person whose interest in the subject matter insured is insured by the policy. It is the person protected under the insurance contract. In some cases there can be many persons who have their insurable interests insured under the lineslip.

‘Underwriters’ (UWs): Insurers who have agreed to indemnify the insured. Also, individuals who respectively agreed, as underwriting agents for each insurer to accept the risk on each insurer’s behalf. They determine the amount, price and conditions under which a submission is acceptable. Underwrite different proportions / percentages of the risk pro tanto (i.e. they are only liable for their own line).

Risks can be oversubscribed (i.e. for 200%) so then it will be written down. The rationale for this is that is reduces the liquidation risk.

‘Leading UW / Following Market’: The first UW agreeing to underwrite the risk on the slip – usually somebody respected in the market. This insurer plays a primary role in the negotiation of the lineslip and can take as much percentage of the risk as desired.

The following market is the subsequent subscribers to the risk. They negotiate less and are meant to take on the same risks on the same terms as the leading UW but they can qualify some terms.

‘Slip’: The insurance contract itself, unless it is intended to be superseded by an insurance policy. This is negotiated between the insured and the UW. The ‘slip’ (piece of paper itself) contains all the pertinent information regarding the risk and terms & conditions. Broker submits to UW, who signs and notes percentage and pricing if it wants to participate on the risk. It can be a mixed market lineslip between Lloyds’ insurers and the company market.

‘Lineslip’: An insurance contract agreed to by various co-insurers. It embodies lots of contracts with a number of different UWs.

‘Insurance Certificate’: Evidence of the insurance cover. Important for statutory insurances, such as motor insurance and employer’s liability insurance where one must be issued by the insurer. These certificates are often issued in a prescribed form under delegated authority agreements.

‘Covers’: Various categories of insurance cover available under an insurance policy. Insurances containing separate covers may be interpreted as a composite insurance arrangement under which each cover is severally interpreted as a distinct contract. Defines the subject matter insured and the risks.

‘Subject Matter’: The thing (property, liability, right or expectation) in which the insured’s interest is insured.

‘Risks’: Several connotations – 1) Risk management. 2) Wide sense: the entire exposure of an insurer to a single or group of contracts. 3) Narrow sense: insurance perils.

‘Perils’: The events against which the insured’s interest is insured. A contingency or fortuitous happening which may be covered or excluded by the insurance policy. There will be both included and excluded risks.

‘Premium’: The consideration paid by the insured for a contract of insurance; amount insurer charges to provide coverage. May be calculated by value (property), turnover (liability) or lump sum. Broker’s commission dedicated from the premium, so a lump sum is paid from broker to the UWs, minus commission.

‘Broker’s Commission’: This is the broker’s consideration for its intermediary services earned by the broker from the insured and generally deducted by the broker before payment of premium to the UW.

‘Claim’: A claim submitted for an insured loss but ‘claim’ has an inherent ambiguity in the context of liability insurance because it may refer to the claim against either or both the insured and/or the insurer.

‘Loss’: A loss falling within the terms of the insurance contract. Again there is an inherent ambiguity – it could be the loss of either or both the third party claimant and/or the insured.

‘Indemnity’: Amount payable by the insurers under a:

1. Defined benefit policy – Pay out on the happening of an insured contingency; i.e. a guaranteed sum for life assurance.

2. Indemnity policy – Pay out amount to indemnify the insured in respect of its loss to their interest in the subject matter insured. No more than their loss.

‘Deductible’: The excess proportion of any loss that is payable by the insured. Insured agrees to insure themselves for the first part of a loss.

‘Open Cover’: A facility under which multiple interests in various subject matters insured for various insured persons may be underwritten. Flexible policy that can accommodate more risk and subject matters (have them attached to the policy) as time goes on.

‘Declaration’: The notification by the insured of the insurer of information for one of various purposes. Certain declarations must be made to attach risks to the policy. E.g. Calculation of premium; the attachment of future risks (further interests, subject matters, perils or insured); or for ongoing purpose of risk management.

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