An insured must have an insurable interest in the matter insured. He must stand to lose in the event of the insured event occurring. If an insured lacks the interest in the subject matter insured, the policy is enforceable. It is possible for persons to have joint policies and be co- insured, when each has an interest in the same matter.
The Life Assurance Act 1774 prohibited life policies on any personal event in which the insured no interest or by way of gaming. This Act was extended to Ireland by the Life Insurance (Ireland) Act, 1866. A policy is null and void and unlawful in the absence of the requisite interest on the part of the insured. Following the Insurance Companies Act, 1909 and the Insurance Act, 1936, most close relatives of an insured will have an insurable interest in his or her life.
Indemnity and Other Policies
Indemnity is the principle by which a person agrees to hold good and reimburse another, for loss actually incurred. A central feature of many insurance contracts is an indemnity of the insured arising from loss caused by the insured risk. The insured must suffer loss. He must have some economic or other connection to the insured risk and subject matter, by which he will suffer quantifiable loss
Life insurance and accident insurance contracts are not contracts of indemnity. A non-indemnity policy is one where a fixed or ascertainable sum is paid on the occurrence of an event, typically the death of the assured. In contrast, indemnity policies are compensation for loss actually arising. It is limited to the extent of loss actually suffered.
Issues may arise in relation to the determination of the quantum of loss under the policy. Loss assessors, actuaries and loss adjusters pay may be involved in disputes over and appraisal of the extent of loss incurred and its calculation and appraisal.
In the case of insurance of buildings or goods, the insured must have an ownership interest in the goods or land concerned. If a policy is maintained in the name of an entity which does not own or have an interest in the thing buildings concerned, it may be claim on the insurance.
It may be possible to show that the insurance policy was effected on trust with the entity which has the required interest, in some cases. Similarly where a motor insurance property damage policy is held by person who does not own vehicle, they may not recover property damage.
A policy of gaming and wagering is void. In a wagering contract, the very act of entry in the contract constitutes the risk of loss. In the case of an insurance contract, a separate risk of loss is insured. There may be cases where questions of interpretation arise as to whether a contract is a valid insurance contract or an invalid gaming or wagering contract.
Indemnity Interest and Risk
All insurance contracts must specify a risk. It would be defined by the terms of the insurance contract. It may relate to loss of goods, property or other economic loss. The insured pays a premium in return for the insurer underwriting the risk.
Generally, insurance covers the extent of loss actually suffered. This may or may not require reinstatement. This depends on the terms of the policy. A policy may cover the cost of rebuilding, even though this is in excess of the financial loss. It may allow the cost of building or buying an equivalent alternative.
Where there is no right to reinstatement, the insured is generally entitled to the financial loss actually suffered. Insurance policies will not generally cover consequential or indirect loss.
The sum insured may not necessarily be the actual loss or l iability.A policy may be valued. Where the value of this particular item has been specified in the policy and agreed, this is deemed value and the insured will be entitled to recover the sum agreed insured, if the loss arises.
Subrogation is a fundamental principle in all contracts of indemnity, including insurance contracts. Subrogation allows the insurer to step into the shoes of the insured for the purpose of exercising his rights and remedies against third party. Abandonment is the surrender by the person claiming indemnity, of all rights in respect of the matter.
Where the insurer has paid out, the insurer is entitled to benefit of any compensation which the insured may have against third parties. Where the payment has already been made, the insured must account to the insurer.
Subrogation does not apply to life and accident policies. They are not policies of indemnity. Subrogation will not usually apply unless and until the insured has been fully indemnified. It will only apply to the extent of payment actually made for loss sustained.
Contribution is an equitable principle. Payment by one insurer of the full loss will discharge other insurers of the same thing or matter. Where a person is over-insured, each insurer is bound as between them, to contribute proportionately to the amount for which he is liable under the contract. Where an insurer pays more than his proportion, he is entitled to maintain an action for contribution against the other insurers.
In order for the principle of the contribution to apply, there must be identical insurance on the same subject matter. Each policy must be a policy of indemnity. The risks and the party insured, must all be the same. For example, each of a landlord and tenant have different interests in property, so that generally, there will not be contribution where each recovers its own separate loss.
Insurers may contract out of contribution by providing a clause to the contrary. In such case, the insurer is not liable, if the insured is entitled to indemnification from others. Policies may provide that the insurer is only liable for a proportion of the losses sustained, where losses are recoverable from others. Difficulties can arise two or more policies contain such clauses.
The rules on the formation of insurance contracts are no different than those for contracts generally. Generally, it is the insured who offers to make the contract by completing a proposal form. There may be a cooling off period under legislation. In some cases, where the insurer needs to assess the application form, it may be the insurer who makes the offer by returning with the details of the premium ,which must in turn be agreed by the insured.
The terms of the proposal form may constitute terms or warranties of the insurance policy. Where warranties are made the basis of the contract of insurance, then it may be void if they are not true or if they are falsified in some way. The duty to disclose may be set out in the proposal form or may be set out separately The common law duty of disclusre is well established, even if it is not set out in the policy.
In a life insurance policy, medical history and other matters of health relevant to the risk will be of key importance.
See the section on regulation in relation to consumer protection rules that apply in relation to taking out insurance policies.
Commencement of Policy
An insurer may accept the application by issuing a policy and accepting the premium. Regulatory issues play arise in the formation of the contract and in a consumer context.A cover note may issue as short-term or interim insurance cover. They are most commonly found in relation to motor insurance. They would not be found in relation to certain types of insurance such as life assurance.
Practical difficulties may arise in relation to cover notes, in that they do not contain all or many of the terms of a policy. They may specify minimal details, such as the risk, the parties and the cover period. The cover note may refer to and provide that the usual standard terms and conditions of the policy apply.
A policy must be renewed on expiry, if cover is not to cease. The obligation to disclose material matters will arise afresh. The duty of utmost good faith applies on renewals. The insured may or may not be obliged to complete a new proposal form. In many cases, the policy is automatically renewed and rolled over. In some cases, the insurer may request confirmation as to whether there are any material changes. Insurance policies may allow a period of grace for payment of the premium for renewal.
Duty of Good Faith
A fundamental principle of insurance contracts is the insured’s duty of utmost good faith. The special facts upon which the insurance company assesses the risk are commonly within the knowledge of the insured. The insured must trust the insured’s disclosures and representations. It must be able to do so with confidence that nothing material is being held back. The duty of disclosure arises from the inherent nature of the insurance contract.
Where the insured knows of or conceals material facts, the insurer is generally entitled to avoid the policy. Failure to disclose anything of relevance to underwriting the insurance renders the policy voids. It does not usually matter that this occurs by mistake or an error and without fraudulent intent.
The principle of utmost good faith requires disclosure and is sometimes referred to in its Latin name, umberrimae fidei. Every circumstance is material which would influence the judgment of a prudent insurer in fixing the premium or deciding whether to take the risk. The test is objective. It is not what the person seeking insurance or indeed the insurer necessarily regards as material. The standard is objective. Each party to litigation may call experts to give evidence as to what they would regard as material.
Certain types of material risk may not require to be disclosed. These would include factors and circumstances which diminish the risks, circumstances which might reasonably be known to the insurer (such those of common knowledge or notoriety) and superfluous matters. It does not apply where the requirement is waived.
The duty to disclose arises before the contract is made. Generally, the disclosures take place on the proposal form. Warranties on disclosure may be made the basis of the insurance contract. There are limits to the duty of disclosure. In respect of matters that are not patently material, the insurer should make proper enquiries and request specific disclosure.
Generally non-disclosure must relate to a matter which the insured is aware of, at the time of insurance. The insurer must generally be able to prove knowledge. It may not be enough that the insured ought to know a particular matter. The issue is particularly relevant in the context of life insurance. Where a person is aware of instances of ill health, its non-disclosure is likely to invalidate a policy.
Misrepresentation is equivalent to non-disclosure. This is an misleading, incorrect or false response to a question in a proposal or otherwise. A material representation is one which would affect the judgement of a prudent insurer, in fixing the premium or deciding whether to insure. A representation may be of a matter of fact, or of a matter of belief.
A representation as to a matter of fact is true if it is substantially true and the difference between what is represented and what is actually correct, would not be considered material to a prudent insurer. An innocent misrepresentation may entitle the insurer to avoid the policy. Where misrepresentation relates to opinions or belief, an honest opinion and belief at the time is sufficient. A representation as to a matter of expectation or belief, is true if it is made in good faith.
Where an insured states that he is in good health and it later emerges that he is suffering from a disease of which he was unaware, this would not be misrepresentation. If, however, he has reasons to believe he has a particular illness and he understates or plays it down, it may be regarded as a misrepresentation which would avoid the policy.
As with contract law generally there may be conditions and/or warranties in the policy of insurance. In the context of insurance, many warranties will be equivalent to “conditions”, in the sense that breach will entitle to the insurer to avoid the contract. Obligations may be expressed as pre-conditions to the existence of a contract or to the insurer’s liability.
Some policies will impose on-going conditions on the terms of cover. It may be a condition, for example, that a vehicle is kept in a particular minimal roadworthy compliance state and condition. Where there is a breach of condition, the insurer may choose to waive the breach, in which event, it may no longer treat the policy as void. The insurer may impliedly waive a condition, where it proceeds to affirm the policy in knowledge of the breach of condition.
A warranty is an affirmation by a party to the policy that certain facts are true. Under contract law generally, breach of warranty does not entitle the other party to terminate. However in the context of insurance, breach of warranty will generally entitle the insurer to repudiate liability. In order it should be a warranty in this sense, it must be unambiguously so expressed.
The courts will interpret the warranty against the interests of the insurer. The courts do not favour the insurer who seeks to avoid liability on technical grounds. However, if the language is clear and there has been clear breach of warranty, the contract may be avoided.
An insurer may specify that a particular warranty is the basis of the contract. If this is falsely answered, the insurer may avoid the policy. This may be the case even though the statement is not critical. Questions may arise as to whether this constitutes and unfair contract term, which may by invalid in the contest of an insurance policy with a consumer .
General principles of interpretation of contract apply to the interpretation of insurance policies. The courts will look at the policy as a whole. It is interpreted in light of the parties presumed intention. Generally, the ordinary or literal meaning of words will apply, unless it leads to an absurdity.
Where there is an ambiguity, a reasonable interpretation will apply. In interpretation generally, the contract is interpreted against the interests of the party who has put forward the policy. However, this will only apply where there is an ambiguity. Where words are clear, effect will be given to them.