IF3 – Unde Underwr rwr iting Process Unit 3 – 3 – Understand insurance policies in relation to the insurance underwriting process
REGULATION
Importance of the policy • The policy contains the details of the terms and conditions of cover.
the policy is not the contract itself, it is evidence evidence of the • Although the contract and the courts will rely on it to make decisions. • In the case of dispute arising from ambiguity in the contract, the parol evidence vidence rule applies, i.e. neither party legal doctrine of parol can rely on any negotiations leading up to the contract but only on the contract itself.
Need for clarity • CONSUMER INSURANCE (DISC ISCLOS LOSURE URE AND REPRESENTATIONS) ACT 2012 –Underlines –Underlines the importance of • how clear, and how specific, the insurer’s questions in the proposal proposal form were, and • any relevant explanatory material or publicity produced or authorised by the insurer
• CONSUMER RIGHTS ACT 2015 –if –if a term of a contract is not transparent t ransparent or prominent, prominent, it can be assessed for unfairness. –Significant –Significant terms of insurance contracts with consumers must be expressed in plain and intelligible language and have been adequately brought to the insured's attention. –If –If a contract term is deemed unfair, it will not be binding
• Contra Preferentem Rule (common law) – An ambiguous term in the contract contract will be interpreted interpreted against the party drafting the contract.
STRUCTURE FORM AND CONTENT
Heading Preambl Preambl e (Recital e Clause) c n Signature a r Operative Clause u s The Schedule n I f Exceptions o Conditions y c Particular Conditions i l o Memoranda Clauses P Information and
shows the name and registered address of the insurer Offer and acceptance, insurer undertakes to indemnify the insured, who undertakes to pay the premium, proposal form is basis of the contract. Pre-printed signature of an official of the company. Not strictly necessary. Outline of the cover. May May cover several se veral sections. Describes the risks or events (perils) that are insured against Contains Policy number, number, Risk address, Period of insurance, Details of the subject matter insured, Sums insured Details the excepted risks or losses that the insurer does not want to cover. Implied Conditions: Conditions which are not stated in the policy polic y. Express Conditions: Conditions : Conditions are written in the policy. Relate to the conditions in respect of each risk or type of loss or damage Clauses which clarify the intentions of underwriters or extend or limit the indemnity provided in certain cases Definitions, Customer Service Standards, Complaints Procedure, Claims Information
EXCEPTIONS 1. SPECIFIC EXCLUSIONS 2. GENERAL EXCLUSIONS
Specific Exclusions • These exclusions are specific to certain perils and sections of the policy. • Examples: p eril. –Excluding goods left in the open is an exclusion under the storm peril. thef t. –Excluding cash is an exclusion under theft. –Excluding damage while the buildings are unoccupied is an exclusion under the escape of water peril.
General Exclusions • War and Related Perils –Fundamental Risk – Generally regarded as being the responsibility of the state. –Marine and Aviation policies can be extended to cover W ar risks.
• Radioactive contamination and explosive nuclear assemblies –contamination as a result of a nuclear accident; –liability for nuclear installations; –these are usually insured in specialist market pools.
General Exclusions • Terrorism excluded by insurers' insurers' standard – All damage as a result of terrorist attacks is excluded commercial property wordings for risks written in the UK. –The insured may purchase an extension to cover all properties (no adverse selection). –Cover includes “All Risks” including terrorism damage by biological contamination and nuclear contamination. –Pool Re (Government funded) became a reinsurer for the insurers. –Each individual insurers' maximum liability is 'capped' for each terrorist event and per year. –Excluding Northern Ireland. –The support provided by the Government (through Pool Re) applies to political actions only and would therefore exclude 'religious and ideological' events.
General Exclusions • Pollution and/or contamination –Property Insurance: • loss or destruction or damage caused by pollution or contamination but this shall not exclude destruction of or damage to the Property Insured, not otherwise excluded, caused by (a) pollution pollution or contaminatio contamination n which itself results results from a peril peril hereby insured insured against; (b) any peril peril hereby insured insured against against which itself itself results from pollut pollution ion or contamination. contamination.
–Liability Insurance • Excluding any claim or loss directly or indirectly due to: a) any pollution of buildings or other structures or of water or land or the atmosphere; or b) any bodily injury or property damage directly or indirectly caused by pollution; unless caused by a sudden, identifiable, unintended and unexpected incident which occurs in its entirety at a specific time and place during the period of insurance.
General Exclusions • 'eRisks‘ –Exclusions relating to the 'millennium bug', the development of computer technology and the threat posed by cyber risks such as computer viruses and phishing.
• Property covered by Marine Insurance However they may be called into –Standard exclusion I Property policies. However contribution.
• Contractual liability –Claims arising from an agreement entered into by the insured and extends the insured's responsibilities beyond the common law position.
• Sonic bangs –Damage arising from pressure waves from aircraft or other aerial devices travelling at sonic or supersonic speeds is excluded.
CONDITIONS
Conditions • Duties of the insured –This condition simply states that the insured must observe and fulfil all the terms of the policy.
• Alteration –This extends the duty of disclosure to a continuing duty, and requires the insured to notify the insurer of any changes that increase the risk.
event of a claim • Action by the insured in the event –This varies from one class of insurance to another, but includes reference to how soon a claim needs to be notified and usually the method of notification.
Conditions • Fraud –any –any benefit under the policy is forfeited if: • the claim is in any way fraudulent (including artificially inflating a claim); • any fraudulent means or devices are used to obtain any benefit under the policy; • any destruction or damage is caused by the willful act of the insured or anyone acting on the insured's behalf.
• Reasonable precautions –Insured's –Insured's duty to take reasonable care and precautions to minimize the risk of loss or damage or of incurring liability. –Courts –Courts do not always enforce these against the insured unless willfully allowing damage to happen or recklessness is proven.
• Arbitration –deal –deal with quantum (amount) disputes in settlement of claims. –The –The Insured may refer to the Financial Ombudsman Service in respect of consumer insurance and micro business.
• Cancellation
Conditions The following have already been dealt with in W01 • Contribution • Subrogation • Average
1. Subrogation is a. the right right of of the insured insured to claim claim from from the third party party and the the insurer. b. the right right of the the insurers insurers to ask ask insurers insurers who who cover the the liability liability of of the third party to pay for the loss. c. the right right of insurer insurers s to propor proportiona tionately tely contribut contribute e to a loss. d. the right right of insurer insurers s to pursue pursue recovery recovery of the claim claim they they paid to the insured from a responsible third party.
2. What effect does a contribution condition have? a. It means that the the insurer insurer will will not contribut contribute e to a claim claim covered covered by by another another insurer. b. It means that the the insured insured cannot cannot claim claim because because itit is fraudulent fraudulent to have have more than one policy. c. It means means that that the insu insured red can can claim claim the full full amount amount from any any of their their insurers.
d. It means means that that the insurer insurer's 's liabili liability ty is restricted restricted to its its ratable ratable share share of the loss.
3. It is important for pooling risks ris ks that equitable premiums are charged for the risks accepted into the pool. How can can the average condition help insurers to manage the pool? a. By chargin charging g an automatic automatic uplift to ensure ensure there there is an an adequate adequate sum sum insured. b. By limiti limiting ng the amount amount paid paid out out if a risk risk is underi underinsure nsured. d. c. By limiting limiting the the amount amount paid paid out to to the averag average e paid out for for other other similar similar claims. d. By cancell cancelling ing the policy if the sum insur insured ed is above above a defined amount. amount.
EXCESSES, DEDUCTIBLES AND FRANCHISES ALREA LREAD DY
COVE COVER RED IN
W01
4. Which is false? a. An excess excess is he first first amount amount of each and and every every claim claim for which the insured is responsible. b. A franchis franchise e is an amount amount of loss loss that, that, once once exceeded exceeded,, the claim is payable in full. c. A deductible deductible is the first first amount amount (usual (usually ly a large large one) one) of each and every claim for which the insured is responsible. d. A franchise franchise and and an excess excess have have the same effect effect on a claim. claim.
WARRANTIES, CONDITIONS AND REPRESENTATIONS
Warranties and Conditions warranty is a promise made by the insured • A warranty relating to facts or to something which they agree to do. warranty may relate to past or present facts • A warranty (i.e. be a promise that something was so or is so), or it may be a continuing warranty, in which the insured promises that a state of affairs will continue to exist or they will continue to do something.
W ARRANTY A warranty is a promise made by the insured relating to facts or to something which they agree to do.
Exact Compliance warranty must be exactly exactly complied with. with. If it • A warranty is broken, cover terminates even if the breach did not cause or have any connection with a loss and even if the breach has been remedied by the time a loss occurs. • For example, example, a “No Smoking Warranty” Warranty” means means just that. The insured cannot raise a defence that he was unaware that his employees were secretly smoking in a store room which caused a fire.
ARTLEY EY DE H AHN V. H ARTL (1786) The insured warranted that the ship sailed from Liverpool on its journey via Africa to the West W est Indies with 50 hands on board. In fact, it sailed s ailed with only 46 hands but took on six extra men in Anglesey, making 52 in total, shortly after it left Liverpool. The court held that the insurer could avoid all liability for breach of warranty, even though the breach could have no connection with the subsequent loss..
Exact Compliance • Discuss –How would you word a no smoking warranty on a factory to avoid a breach in the above circumstances?
• Suggested answer maintains a no smoking rule on the –Warranted that the management maintains premises. –In this case the obligation is on management to maintain the rule. If the rule is broken by an employee hiding and smoking in a store room, there was no breach because the management complied and maintained the rule.
Continuing Warranties • These relate to a state of affairs that an insured must maintain in relation to the risk. • For example, a warranty that the premises shall be maintained in good repair means just that. If the premises fell into a bad state during the policy period and were later restored, the breach has occurred even though the premises were restored before a claim occurred.
Give examples of continuing warranties • Examples: –rubbish to be cleared up each night –an intruder alarm system to be kept in good working order and regularly tested –that the insured should take safe keys home with him when they leave business premises at night. –that no inflammable oils may be stored –no woodworking should take place.
Form of Warranties • Warranties may be –Expressed –Expressed : These are warranties which are written into the insurance contract. –Implied: –Implied: there is no need to mention them in the policy because they are implied. This is the case in marine insurance regarding the warranty of seaworthiness of the vessel. –There are no implied warranties in property insurance.
M ARINE INSURANCE ACT 1906 – W ARRANTY OF SEAWORTHINESS IN terms of section 39 every marine insurance policy automatically carries the implied warranty of seaworthiness.
Form of Warranties • Basis of contract clauses have been abolished by the Insurance Act 2015 and it will will no longer be possible for representations to be converted into warranties –Basis –Basis of the contract clauses apply to statements made during the presentation of risks. They convert statements from representations into warranties. –Ordinarily, false representations do not affect coverage unless they are material to the risk and influence the judgement of the underwriter involved.
f alse representation of any type, –If the policy contains a basis clause, a false even if not material, will allow underwriters to decline indemnity for breach of warranty. –This has often been struck down by the courts as unfair and the test of materiality applied.
Conditions • Policy conditions are terms that impose important obligations upon the insured. • Condi tion s precedent precedent to the contract –must be fulfilled prior to the formation of the contract itself. The implied conditions (e.g. insurable interest, utmost good faith etc.)
• Condi tion s subsequent to the contract – must be complied with once the contract is in force, e.g. notification of alteration of risk.
• Condi tion s precedent precedent to liability –must be complied with for there to be a valid claim. If not complied with, insurers may avoid liability for a particular loss, but need not repudiate the contract as a whole. IF3 - Unit 3 (Version (Version 3)
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Give some examples of conditions precedent to the contract in property insurance Misrepresentation ion and non disclosure –Misrepresentat –Payment of premium prior to the commencement of the policy
surveyor complied with prior to inception of cover –Recommendations of surveyor cover. –No known or reported losses prior to commencement of cover.
Give some examples of conditions subsequent to the contract in property insurance • Notification of alteration of risk • Average • Purchase Purchaser’s r’s interest • Reasonable Precautions
Give some examples of conditions precedent to liability in property insurance –Notification of loss or damage to the insurer –Preservation of rights against third parties –Mitigating losses –Fraudulent or false declarations when making a claim –Control of litigation proceedings
Effect of Breach before 2015 Act • The consequence of a breach of warranty resulting in termination results in: –Insurers may avoid paying claims occurring after the time of the breach; –Claims paid before the time of a breach remain valid; –Claims paid after the breach because the insurer was unaware of the breach, must be refunded to the insurer.
insurers do not have to • At common law, the insurers prove prov e a con necti on betw een een the breach breach and any loss th at has has occ urred . • Since the policy terminated on the time of the breach there was no policy in force during the occurrence.
B ANK OF NOVA SCOTIA V. HELLENIC MUTUAL W AR RISKS ASSOCIATION (B ERMUDA) L TD (THE GOOD L UCK ) (1992) The House of Lords held that a breach of warranty terminated cover automatic ally from the date of breach and, to all intents and purposes, terminated the insurance policy.
Effect of Breach – 2015 Act ACH H OF SECTION 10 – B REAC warranties will become "suspensive "suspensive • All warranties W ARRANTY conditions" (section 10 of the Act). This means that an insu rer will be liable for (1) Any rule of law that breach of a los ses that take place after after a breach breach of warranty (express or implied) in a w arranty arranty h as been been reme r emedied died , assuming contract of insurance results in the discharge of the insurer’s liability this is possible. under the contract is abolished. • Thus, for example, if an insured breaches (2) An insurer has no liability under a contract of insurance in respect of a warranty that an alarm system will be any loss occurring, occur ring, or attributable to inspected every six months, that breach something happening, after a warranty (express or implied) in the will be "remedied" if the system is contract has been breached but inspected after seven months, and so before the breach has been remedied. coverage will be suspended for only one month in such circumstances.
Connection between breach of warranty warranty and the t he loss. ERMS MS NO NOT T RE RELE LEVA VANT NT will no longer be able able to rely on 11 - TER • An insurer will TO THE ACTUAL LO LOS SS non-compliance with a warranty, if th e (1) This section applies to a term non-compli ance could not h ave (express or implied) of a contract of incr eased eased the risk ris k of lo ss that occurred insurance, other than a term defining the risk as a whole, if compliance in the circumstances that it occurred. with it would tend to reduce the risk
–For example, if a requirement in a policy to maintain window locks is not complied with by the insured party and loss is subsequently caused by flooding, then the insurer will no longer be able to rely on the insured party’s non-compliance to avoid liability as the maintenance of window locks could not have reduced the risk of flooding occurring.
of one or more of the following— following — – (a) loss of a particular kind, – (b) loss at a particular location, – (c) loss at a particular time.
(2) If a loss occurs, and the term has not been complied with, the insurer may not rely on the non-compliance to exclude, limit or discharge its liability under the contract for the loss if the insured satisfies subsection.
Connection between breach of warranty warranty and the t he loss. • This will not apply in respect of terms that define the risk as a whole –for example, terms restricting cover to drivers over a certain age, rather than a term that relates to loss of a particular kind such as anti-theft device warranty. If a vehicle is being driven by a driver under the stipulated age, the whole cover is suspended at that time.
• The onus is on the insured to prove that noncompliance did not increase the risk of the loss which actually occurred. f or dispute, it would be • In order to limit the scope for advisable for insurers to specify in their policies what requirements they wish to impose, what risk of loss that requirement is intended to address and what consequence non-compliance will have.
ERMS MS NO NOT T RE RELE LEVA VANT NT 11 - TER TO THE ACTUAL LO LOS SS (3)The insured satisfies this subsection if it shows that the noncompliance with the term could not have increased the risk of the loss which actually occurred in the circumstances in which it occurred.
Summary WARRANTY
CONDITIONS
• Cover is suspended during the breach of the warranty. • There must be a connection between the breach and the loss for insurers to deny a claim. • The burden is on the insured to establish that its noncompliance with a particular term “could not have” increased the risk of the loss for which the insured is actually claiming arose.
• Condition Precedent to the contract –Policy never took effect
• Condition Subsequent to the contract –Same as warranties
• Condition precedent to liability –Particular claim may be rejected
Example of application of Warranty W arranty under Insurance Act 2015
1 April Policy starts. Warranted Burglar Alarm installed, maintained and activated at all times outside business hours.
1 June – June – Burglar alarm stops working. Theft cover is automatically suspended.
15 June – June – Burglary occurs – not covered
20 June – June – Fire occurs – occurs – covered if the Insured can show that the breach of warranty did not increase the risk of the loss.
Coverage where the risk has been increased due to the breach of warranty is suspended
1 July – July – Insured remedies the breach – breach – i.e. fixes the burglar alarm
1 August – August – Burglary covered
Prior learning check: answers 1 D 2 D 3 B 4 D
