#4931 - Risk Declaration - Insurance Law

Risk Declaration

Key Issue

Insurance terms in an open cover arrangement making provision for risk and claim attachment; i.e. how to attach either different SMs or different insureds to the policy so they are covered by insurance and UWs are obliged to indemnify.

E.g. If you have a policy providing blanket cover against loss / damage for the worldwide shipment of goods, each time you send a consignment, that consignment needs to attach to the policy.

E.g. If you insure someone against their liabilities for a year you must consider how the particular liability they incur attaches to the policy.

-------------------------------------------------------------------------------------------------------------------------------------

Insurance Facilities – Types of Cover

1) Facultative / Facultative: Optional arrangement – no obligation on either party. It is a facility and does not actually insure / create an insurance policy. Here an UW may agree in principle that they would give insurance, so as and when the insured wants to get insurance cover they contact the insurer. There is a discretion for the insured to declare a particular risk to an UW and the UW has discretion whether or not to accept the risk, as no deposit paid by the insured.

2) Facultative / Obligatory: Similar to the above, except the obligation is on the insurer. Here the insured is not obliged to declare risks to the UW / refer the risk to the UW to obtain insurance. But if the insured does not ask the UWs for an insurance arrangement, the insurer is obliged to give the insurance previously agreed. The declaration of the risk is essential to the attachment of the declared interest to the SM insured.

E.g. It is common in reinsurance where the reinsured essentially has a contractual option which he can exercise by referring the risk to the reinsurer and binding him to cover that risk. Not common at the primary level.

3) Obligatory / Facultative: Obligation is on the insured. The insured is obliged to give the insurer the first option to insure, but it is facultative on the part of the insurer who can decide whether or not to accept the risk.

4) Obligatory / Obligatory: An open cover facility where the insured has agreed to declare risks to the insurer and the UW has an obligation to insure those risks under the open cover arrangement. A declaration is not necessary for the attachment of the risk as there is a pre-arranged agreement to accept them, but it enables the insurer to calculate their premium. The open cover itself contains a binding mechanism which enables all risks to attach to the policy and obliges the UW to underwrite those risks in full. Formation of the insurance contract will pre-date the declaration of the risk; i.e. a floating policy (s.29 MIA).

-------------------------------------------------------------------------------------------------------------------------------------

The Role of Agency Relationships

Situation: A freight forwarder has an open policy as he is obliged to arrange / insure the carriage of many customers’ goods worldwide. Under that open cover a freight forwarder declares risks for their clients when goods are despatched. There is an open cover policy taken out in the freight forwarder’s name but the freight forwarder has the right to declare risks not for its own benefit but for the benefit of the parties it represents. Hence the freight forwarder is the ‘coverholder’ – he is holding the relevant cover even though its interests are not covered. He is an agent.

Agent Acts with the Authority of its Principal

The freight forwarder has the authority to insure at the time its makes a declaration to UWs.

1. Disclosed Named Insured – A has disclosed P (the existence of the agency relationship) as UWs know from the nature of the cover. Here the agent takes out insurance on behalf of a particularly named principal. All is good.

2. Disclosed Unnamed Insured – A takes out insurance for the benefit of ‘those whom it is instructed to insure’. Here the P is disclosed but unnamed under the policy as they are not specifically identified. For example, they may have been defined in the policy as a group without a specific name.

3. Undisclosed Insured – A freight forwarder may take out insurance in its own name and not indicate by the cover it is going to be making declarations in respect of other parties. UW thinks the insured is taking out the insurance for themselves and agrees insurance on that basis. The agent must have had instructions at the time they placed the risk or this is a mistake. The undisclosed principal can sue in its own right / enforce the contract (Siu Yin Kwan). The agent can only contract for an undisclosed principal where it has instructions to do so. If there are no instructions then there is no undisclosed principal.

Agent Acts with No Authority

1. Disclosed Named Insured – Ratification: Named insured had not given authority to the agent to place the risk on their behalf at the time risk is placed. Insurance is taken out to cover their back for loss. Their interest is embraced by the policy.

A named insured can subsequently ratify the agent’s act. When?

• S.86 MIA: For marine insurance a principal can ratify after or before the date of loss.

• Non-marine insurance: It is unclear whether the principal can ratify after loss. Traditional cases (Grover) say no. However more modern cases doubt that position (National Oil Well v. Davy).

2. Disclosed Unnamed Insured – Same as (i); i.e. member of a class.

3. Undisclosed Insured – Here the policy is obtained in the agent’s own name. Ratification is not possible as no undisclosed principal is in existence. Can never ratify the agent’s act (either before or after loss) because the agent made the contract on his own behalf. Also could be a failure of the DUGF if the non-disclosure was material. Someone cannot just come along and claim benefit if not within category of people and the agent had no authority to take out on their behalf.

-------------------------------------------------------------------------------------------------------------------------------------

Risk Attachment by Declaration Notification

‘Declaration Notification’: Where declarations are made attaching a particular SM, insureds, interests or risks to the policy. Applies to tangible property.

• Declarations as to subject matter insured – Common for annual worldwide goods in transit cover. Cover lots of risks and UWs must control...