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5 - Insurable interest (Law on insurable interest (Life and other classes,…
5 - Insurable interest
Principles of an insurance contract
Offer and acceptance
Communication of acceptance
If the proposer acts in reliance on an offer, this is considered a valid form of acceptance
What must be agreed
Essential terms of contract must be agreed...
Nature of risk
Duration of contract
Premium
consensus ad idem'
- meeting of minds
Insurers need not spell out all detailed terms
Presumption in law that it will be insurer's usual terms and conditions
Party cannot unilateraly alter terms of concluded agreement
'Signing down' of insurers participation within Lloyd's is still allowed - express contractual condition under MRC
Who makes the offer
Offer can be proposal form which insurer will accept by issuing policy
More usually proposer accepting quotation
Special case in Lloyd's market
Used to be that policy was signed and in force, before detail was set out
Problems arose when there was a difference between the slip signed and the finalised contract
Market Reform Contract (MRC
instroduced to provide contract certainty
Now used by brokers to present risk
Offer now considered to be accepted when UW scratches slip
UW must make it clear if they don't wish to be bound at this point
Renewal
New contract formed when an insurance policy is renewed
Offer and acceptance therefore required again
Renewal terms are offer and any changes from insured are counter-offer
Insurers usually under no obligation to offer renewal on annual contract
Invitations to treat
Difference between true offers and offers to enter into negotiations
When does risk begin to run?
Insurance contract exists as soon as offer is accepted but may not operate immediately
Binding contract to insurer but risk has not yet attached
Contractual intention
Consideration and premium payment
Consideration from insured is promise to pay premium and that of insurer is to pay claims
Under English law, insurance cntract can be in force without premium payment as long as insured has promised to pay
Insurer can stipulate that actual payment is required first
Contracts can be made at 'a premium to be agreed'
Excat premium to be fixed after contract comes into force
Return of premium
Insured not entitled to return premium for cover already provided
If insurer has never been on risk, this is a 'total failure of consideration'
Insured entitled to money back
Could be a number of reasons...
Proposal withdrawn after premium paid
Void for mistake or no
consensus ad idem
Void becasue no insurable interest
Void
ab initio
Cancellation
By insurer
Pro rata return premium
By insured
Less than full pro rata allowed
No contract formed unless parties intended to be legally bound
Formal requirements
Contracts which must be in writing
Only one is a marine policy - under
Marine Insurance Act (1906)
Policy document required for claim but not for valid contract
Contracts which must be evidenced in writing
Contracts of guarantee under the
Statute of Frauds (1677)
Some fidelity guarantee policies but not all of them
Contracts by deed
No legal requirement for any insurance contract to be in the form of a deed
Where written documentation is required
RTA (1988)
requires policy to be in force before vehicle can be driven on public road
No effect unless insured has certificate of insurance
Deregulation Act (2015)
meant that failure of insurer to deliver cert does not affect avlidity of insurance
Under
Life Insurance Act (1774)
, policies must include name of person concerned
Capacity to contract
Contracts made by minors
Insurer fully liable to meet all valid claims
Cannot sue minor unless contract is for necessaries or is beneficial
Mental disabilities and drunken persons
Can only avoid contract if they didn't understand what they were agreeing to and other party knew this
Only a few cases involving insurance contracts
Contractual capacity of insurers
Insurers must obtain licence from the UK regulator before they can transact business
Financial Services Act (1986)
Allowed insured to decide whether to enforce contract, if not they could be their premium returned
Insurers could only enforce at discretion of courts
Insurer can transact across EU member states as long as it is authorised by the regulator in one of them
Regulation of UK financial services under
Financial Services Act (2012)
Financial Conduct Authority (FCA)
Prudential Regulation Authority (PRA)
Insurable interest
Definition
Legal right to insure arising out of financial relationship with subject matter
Key elements
Subject matter
Financial interest in property which they own
Human life
Debt
Financial interest
Insured must suffer financial loss if insured event occurs
Lucena vs Craufurd (1806)
Insured does not need to specify extent of insurable interest
Current interest
Expectation of future insurable interest is not enough
Legal interest
Must be an interest that law recognises and supports
Why is it required?
To reduce moral hazard
Arises when granting insurance actually increases risk of a loss
Could tempt policyholder to commit arson or murder
To discourage wagering
Insurance previously used as means of gambling on lives and property of others
Discouraged by Parliament by requirement for insurable interest
Presence of insurable interest is key difference between an insurance policy and a wager
Creation
Common law
Sometimes automatically presumed to exist
Own life
Property owned
Contract
Landlord can make tenant responsible for maintenance and repair of building (lease)
Creates financial interest which can be insurable
Law on insurable interest
Marine insurance
Marine Insurance Act (1906)
Policies are void in absence of insurable interest
Interest need not exist at time contract is made but must exist at time of loss
Can acquire interest after loss has occurred
May be unaware that cargo has been lost
Life and other classes
Life Assurance Act (1774)
Provisions of the Act
Can't recover more than value of interest
Beneficiary of policy must be named
Void in absence of insurable interest
Must have interest at inception but not at time of claim
Policies on goods
Not subject to statute regarding insurable interest
Legislation on gambling
Gaming Act (1845)
All contract by way of gaming or wagering void
Invalidated policies with no insurable interest
Gambling Act (2005)
Fact that contract relates to gambling should not prevent enforcement
Principle of indemnity still applies
Effect of a policy without interest
Policies are void but premiums are usually recoverable
Contracts made under
Life Assurance Act (1774)
are also illegal in absence of insurable interest
Insurer can refuse to return premium
FOS
advises insurers not to do this
Other insurances
Marine Insurance Act (1909)
made effecting policy without interest illegal
Matter confused by introduction of
Gambling Act (2005)
Regardless of insurabel interest, claim payment will be prevented by principle of indemnity if loss cannot be proved
Waiver of insurable interest
Requirement cannot be waived in cases of Life and Marine insurance
Insurers can still issue policies if they doubt insurable interest but they won't be enforceable in court
Insurable interest waived at time of inception but not at time of claim
Life policies
Marine 'PPI' policies
Reform of insurable interest (life and life-related insurance)
Insurable Interest Bill
published by English and Scottish Law Commissions
Only addresses life and life-related insurances
Void unless insurable interest at inception
Clause 2
Cases in which insurable interest may be proved
Clause 3
Fairness assessment for return premiums on consumer contracts
Application of insurable interest
Insurance of profits
Business Interruption covers loss of profit following damage to insured's property
Liability insurance
Subject matter of liability insurance is the insured's wealth or assets which will be reduced if they have to pay damages
One party in contract may be obliged to insure the whole contract (pervasive interest)
All parties have interest in whole contract
Property insurance
Overlapping interests
Sensible for different parties to agree who is going to arrange the insurance
Party responsible will often be specified in tenancy agreement or deed
Limited interests
Person will often only have limited interest in property but may insure for the full value
Surplus to interest will be payable to other interested parties, e.g. the bank (mortgagee)
Reinsurance
Insurers have insurable interest arising from liability to pay claims
Subject of reinsurance
Property of some description
Subject matter of reinsurance contract
Insurer's liability to indemnify
Life insurance
Business relationships
Partners
Insurable interest in each other's lives up to amount of loss or damage caused by their death
Employer and employee
Employee has insurable interest up to value of minimum period of notice under their contract
Only applies to personal contracts of employment, not those employee by companies
Employer has interest up to value of work provided
'Keyman' policies sometimes taken out to reflect cost training someone to replace senior employee
Creditor and debtor
Creditor may insure to cover debt and any interest payable
Debtor has no insurable interest in the life of the creditor
Family relationships
Everyone has insurable interest in their own life
Common law that spouses has insurable interest in each other's lives
Married Women's Property Act (1882)
Money will pass to beneficiaries if policy is set up for their benefit (i.e. spouse and children)
No other family relationship gives rise to insurable interest (e.g. parent and child)