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.
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.
The interpretation of an insurance policy is subject to general principles of contractual interpretation. In principle, the ordinary meaning of the policy’s words takes precedence. However, the ordinary meaning must be interpreted in its context
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.
The courts have tended to favour the interests of the insured, in the case of ambiguity. The principle that the agreement is interpreted against the party who proposes, it applies with much force in the context of insurance. The courts have been reluctant to interpret clauses against the interests of the insured, unless there is a good reason to do so. The policy will be interpreted against the interest of the insurer in the case of any ambiguity.
The courts have tended to interpret insurance policies liberally, in accordance with the legitimate expectations of the insured. The courts have tended to look at the intention of the parties, in the sense of the overall purpose of the insurance policy. Interpretations which are arguably open on the wording may be rejected, where they are inconsistent with the overall purpose and intent of providing insurance cover.
The Financial Services Ombudsman, who succeeded the Insurance Ombudsman applies concepts of fairness and reasonable expectations, under the Consumer Protection Code, in hearing and determining complaints. The Ombudsman will seek to uphold reasonable expectations of the consumer insured, over the strict words of the policy.
The parol evidence rule applies. Generally, verbal evidence is not admissible to contradict or explain the terms of the insurance policy. However, there are exceptions to the rule. Parol evidence may be allowed to identify the thing insured, interpret words that are not clear without reference to the actual circumstances, prove collateral agreements and to prove additional consistent terms which have been specifically agreed.
Application to Risk and Loss
The relevant loss or damage must be caused by the insured risk. It is sometimes said that the risk must be the proximate cause of the loss. The concept is equivalent to that which applies under the law of tort. See the sections on causation in the law of civil wrongs.
The wording of the policy will determine the extent of loss and damage covered. The policy may cover a loss that arises as a direct consequence of the occurrence of the insured risk. Under some policies, both direct and indirect losses may be covered.
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 a 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 .
The status of warranties in insurance policies is a matter of interpretation. In some contexts, such as under the Marine Insurance Act, a breach of warranty entitles the insurer to repudiate and avoid liability. A warranty might be interpreted as a continuing obligation. However, the courts are reluctant to recognise such continuing obligations during the course of cover. They will seek to interpret where possible, that the obligation is applicable only at the inception of the insurance cover.
Where a continuing obligation is to apply, the warranty language should apply clearly to present and future facts. The circumstances might show that the warranty has limited reference to present facts, with greater application to future facts, in which event it might be more readily interpreted, as a continuing warranty.
Issues about continuing warranties arise most commonly in relation to material damage policies, where the risks are affected by such things as the presence or absence of alarms, fire suppression systems and other steps designed to mitigate the risks.
It might happen that the system is there at the outset of the policy, but has either not functioned or has been allowed to become dysfunctional. If the clause is clearly applicable and is material to the risk, it is likely to be upheld.
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 the knowledge of the breach of condition.
The courts may interpret conditions so that they suspend the policy during periods when the requisite protections are not available. Accordingly, where there has been a breach, but compliance resumes, the courts have been unwilling to allow the insurer to avoid the policy on the basis of the now rectified breach.
There may be clauses which require the mitigation of patent risks. This may arise for example, where the accumulation of flammable maters might greatly increase the risks. Where the clause has been breached and has a material effect on the risk, the clause will be given effect. In some cases, particularly of fire and equivalent material damage, it may be difficult to prove whether a particular breach has contributed to the occurrence of the insured risk.
Insurance policies may contain conditions obliging the insured to take all reasonable care and precaution for his own safety and to prevent and minimise any loss incurred. Policies might require the insured to take reasonable precautions to prevent accidents.
The terms of such clause are a matter of interpretation in the circumstances. What is reasonable will depend on the context of the policy and the nature of the risks. Material damage and motor insurance policies may require the premises or vehicles to be maintained in good condition. A vehicle may be required to be maintained in a roadworthy condition.
Breach of this condition does not generally enable the insurer to avoid the policy. However, if the insured is wilful or reckless, a right to avoid the policy may apply, subject to statutory provisions as to mandatory insurance.
In the context of motor insurance vehicle, compulsory insurance may not be avoided. Liability to the insured in respect of property damage and other non-compulsory cover, may be avoided. The issue commonly arises as in relation to the theft of motor vehicles, where the car is not locked or where the keys are left in the car, in breach of policy obligations.
Almost every insurance contract provides an arbitration clause. See generally the sections on arbitration. The purpose of arbitration is to provide a relatively speedy out-of-court resolution of disputes under the policy. The policy may set out a special arbitration mechanism.
Where this is not provided, the default provisions in the Arbitration Act apply. The arbitration clause allows the insurer to prevent the insured from applying to court in relation to policy disputes. The insurer may apply to stay proceedings on the basis of the arbitration clause.
Insurance policies require notice of claims and certain procedures be followed in the context of claims so as not to prejudice the insurer. If the claim is not notified cover may not be available. The effect of failure to comply is a matter of interpretation of the agreement. Minor breaches are less likely to be interpreted as affecting the insurer’s liability.
The insurer is generally entitled to defend a claim and settle it on such terms as it determines, in its discretion. The insured does not have a right to have the claim defended, although it may choose to do so itself, in order to protect its interest. If the insurer is notified and refuses to take over the claim, it may not be entitled to challenge the settlement reached provided it is not improvident, unreasonable or entered in bad faith.
The insured must conduct the defence in a prudent and proper manner. The insurer will in practice defend the claim in most instances. It will choose its own lawyers. The insured will not be entitled to instruct the solicitor to the detriment, of the insurer’s interest. The insurer will have primacy in relation to matters as the policy provides.
The solicitor must notify any conflicts of interest to the insured. Conflicts of interest may arise particularly if they insured faces criminal prosecution. In such circumstances, the insured may be entitled to require an independent solicitor.
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