Insurance Principles

Insured Risks

Insurance insures against loss arising from the insured risk. The loss must flow from the insured risk.  Generally, direct losses only are covered.  Indirect knock-on or financial losses are not generally covered.

Insurance usually is available only in respect of risks or uncertain events that would have an adverse effect on the insured.  The risk is usually a future uncertain event, which may or may not occur.  It will not generally cover deliberate acts. The acts will be in the nature of accidents or events, outside the control of the insured.

Insurance is traditionally available in respect of some types of risk only. Economically, the insurance market cannot function, unless it can finance the risk concerned by premiums paid for that type of risk by the entire insured population. In practice, the insurance market is limited to certain well-established risks.

Insurable Interest

An insured must have an interest in the subject matter insured.  He must stand to lose something in the event that the insured risk or event occurs.  It is therefore essential, that the insured should be the owner or have another legal interest in the thing which is insured. If the insurance is erroneously held through another entity, the insurance may be of no effect.

The insured must suffer financial loss, property loss or injury, in consequence of the insured risk event having taken place. A contract which compensates a person without an interest in the subject matter is potentially void as a gambling or wagering contract.

In the case of life assurance, the insured must have an interest in the life insured.  Generally, a person may insure his own life or the life of a family member.  Close relatives may have an interest in the life of the insured.  Spouses commonly insure each other’s life. The insurance can be for whatever amount is agreed. It will not have to be proved that quantifiable loss or loss to this extent has been suffered or incurred.

A business will have an insurable interest in the life of its key employees and personnel.  It may take out “key man” insurance, payable on the death of that key person.

Accidental v Deliberate Acts

Insurance usually covers unintended and unexpected events, which do not normally or naturally happen. Insurance policies usually cover accidents by incidents which occur by accidental means or causes.

It is possible for policies to cover deliberate loss depending on its wording, but the scope of such clauses are of limited application.  If the act constitutes a criminal act, recovery by the perpetrator would not be allowed as a matter of public policy.

Liability insurance covers against the risk that accidental legal liability will be incurred to a third party.  A person can find himself or herself liable to compensate another by reason of negligence, nuisance or duty. Where a third party is injured the insurance will generally cover him, even if there is some element of intention.

Contract of Indemnity

An insurance policy is a contract of Indemnity. The insurer indemnifies the insured against losses which arise, if and when they occur.  The insured can only recover for the amount of loss actually suffered. The liability to pay or indemnify the insured arises in the event that loss is suffered from a designated insured risk.

An indemnity is at the core of insurance law. An indemnity is an agreement to hold good or compensate a person, here the insured, for the losses incurred as a consequence of the insured event.  It is an agreement to pay the sum equal to their loss.  A premium is the price paid for the insurance of the risk.  The insurer is obliged to pay the insured, in accordance with the terms of the policy. The liability is not necessarily the amount insured in the policy.

Insurance policies are interpreted in the same manner as contracts generally.  They are interpreted against the interests of the insurance company.  However, if the position is ultimately clear from the document, this will take effect.

Subrogation

There are a number of principles which are common to insurance and other indemnity contracts.  Subrogation is a principle by which the insurer (or indemnifier) steps “into the shoes” of the insured in respect of any claim, which the insured may have against a third-party, by reason of the insured event. If, for example, a payment is made on foot of a fire policy by reason of damage to a building, the insurer, having paid on the policy,  may recover against a third party whose negligence may have caused the damage.

When an insured pays out, it will usually retain the rights to recover from third parties on the basis of subrogation.  The insurer assumes the insured’s rights. The insured does not retain the right.  The insurer may recover, only in respect of the amount paid out. Under many policies, the insurer may waive the right to subrogation against certain parties. This commonly occurs where under market rent leases, where the landlord’s insurer may waive subrogation rights against the tenant, in recognition of the fact that the tenant usually finances the landlord’s insurance.

No Double Insurance

Insurance will usually only be in respect of the amount — loss concerned.  Double insurance will not entitle the insured to double payments.  This does not apply to life assurance.

Where an insured is insured is insured twice against one risk, each insurer must contribute proportionately to the loss, in proportion to the amount for which they hold insurance.  This only applies where the matters insured against and the risks assumed are identical.

Formation of Insurance Contracts and Disclosure

The formation of an insurance contract is similar to the formation of any other contract.  Insurers brokers and agents are subject to regulation.  In the case of personal insurance, and insurance to certain smaller businesses, the Consumer Protection Code may apply.

Generally, insurance is organised on foot of a proposal form.  The completion of the proposal form is critical as the insured — statements in the proposal form may be warranties which become part of the contract.  Therefore, wrong, incorrect statements may entitle the insurer to avoid liability.

In addition, insurance contracts are subject to the principle of disclosure.  The duty of disclosure obliges the insured to disclose all material facts which are relevant to the risk.  Unlike the case with other contracts, the insured cannot rely on silence

There is a code of practice governing proposal forms which seek to suit the kind of provisions its — ought to be included in proposal forms.  The question should be clear.  They should not ask questions beyond the knowledge of the insured, certain — the request for disclosure should be clearly stated and the consequences of non-disclosing material facts should be disclosed.

Frequently, a cover note issues in advance of the full policy.  It usually states the basic terms of the policy.  It will frequently issue where covthe er is required at short notice.  It is usually issued in advance of the complete policy.  The cover note will usually specify a limited period during which it runs.  The purpose is that it is replaced with a full policy.  Generally, the cover note incorporates the terms and conditions of a policy — existing policy, by referring to it.  That cover note is generally for a short period.  It obliges neither the insurer nor insured to — with a full policy usually

Lapse and Assignment

General policies terminate on the date specified, and cover lapses unless renewed.  Each policy is new and the duty to disclose an act with the utmost good faith will apply.  There may be a new proposal form or the policy may simply roll over.  On the basis of the existing form.

If the premium is not paid the policy will usually lapse, in the case of motor insurance notice is required before the policy lapse.

An insurance policy may be assigned as with other assets.  It may be assigned by way of security.  See our separate notes in relation to creating security over accounts, insurance policies, and similar assets.

Duty of Disclosure

In general, contract law, the principle is that of buyer beware.  There is no general duty to disclose facts or circumstances which do not assist one person’s interest.  However,  insurance contracts are an exception to this rule.  They  insured must exercise utmost good faith.  This is because insurance depends on special facts within the insured’s knowledge only.

If the insured does not disclose facts known to him, which are relevant to the insurer and risk insured, the insurer is entitled to avoid that policy.  A circumstance is material for the purpose of the duty of disclosure if it is one which would influence the insurer in fixing the insurance deciding whether to insure and fixing the premium level.

The standard is objective, and is not dependent on what the insured or indeed the insurance company thinks is relevant.  It is what the average insurer thinks is relevant.  The rules apply to a misrepresentation, partial disclosure, or a nondisclosure.

The duty to disclose arises before the insurance contract issues.  It also applies again at renewal, because this is a new contract.  The duty of disclosure is  provided for in the proposal form.

Many insurance policies contain a declaration ration as to the truth, accuracy of the facts which the insured has disclosed in the insurance policy.  These are, in some cases, stated to be the basis of the insurance contract, so that if they are not correct the policy may be avoided.

Where the proposal is stated to form  the basis of the contract, the insurer may be able to avoid the contract if the statement or declaration is in fact incorrect. This may be the case irrespective of the fact that  the answer is innocently given.