INSURANCE CONTRACT LAW

Uta Kohl uuk@aber.ac.uk

Reading:
Sealy & Hooley, Commercial Law – Text, Cases and Materials (4th ed ,OUP, ,
2009)
Law Commission: Insurance Contract Law
http://www.lawcom.gov.uk/insurance_contract.htm
Issue Paper 1: Misrepresentation and Non-Disclosure (2006)
Issue Paper 2: Warranties (2006)
Issue Paper 4: Insurable Interest (2008)
Reforming Insurance Contract Law: A Summary of Responses to
Consultation (2008)

Birds & Hird, Birds’ Modern Insurance Law (7th ed, Sweet and Maxwell, 2007)
James Davey, 'Future Imperfect: Human Genetics and Insurance' [2000] JBL 587
(on westlaw)
ABI on Genetic Testing:
http://www.abi.org.uk/Information/Consumers/Health_and_Protection/499.pdf
James Davey, 'Printpak v AGF Insurance: No Need to be Alarmed' [1999] JBL
580 (on westlaw)
Jonathan Brock, ‘Hurricane Damage and the Law’ (2006) 32 Commonwealth
Law Bulletin 3, http://www.falcon-chambers.co.uk/uploads/docs/section9/JB.pdf

http://www.weird-websites.com/jokes/auto-insurance-car-insurance-claims-
insuranse-motor.htm

1. Introduction

Contract where the insurer agrees, in return for a consideration by the insured
(ie. the premium) to pay a sum of money if (or when, in the case of certainty such
as death) a specified event, in which the insured has an interest, should occur

Insurance contract = policy

Consideration = premium
Insurer = underwriter
Insured = assured

Formalities

Purpose
Reduce risk
Loss distribution
Investment device
Types
Indemnity insurance
Contingency Insurance

Sources of Insurance Law

Common law
Legislation
• Marine Insurance Act 1906, Live Assurance Act 1774, Gaming Act 1845
• Financial Services and Markets Act 2000 (replaces Financial Services
Act 1986, Insurance Companies Act 1982, Insurance Companies
Regulation 1994, Insurance Companies (Third Insurance Directives)
Regulation 1994, Policyholders Protection Acts 1975 and 1997)
FSA rules 'Insurance: New Conduct of Business sourcebook' (ICOBS)
of January 2008 (incl consumer rights)
http://www.fsahandbook.info/FSA/html/handbook/ICOBS
Financial Ombudsman Service at http://www.financial-
ombudsman.org.uk/, see http://www.financial-
ombudsman.org.uk/publications/ombudsman-news/39/abi-39.htm
• not subject to the Unfair Contracts Terms Act 1977 but subject to the
Unfair Terms in Consumer Contracts Regulations 1999
http://www.opsi.gov.uk/si/si1999/uksi_19992083_en.pdf
• on consumer rights see also: http://www.moneymadeclear.fsa.gov.uk/

FSA http://www.fsa.gov.uk/
Lloyd’s of London http://www.lloyds.com/

2. Elements of an Insurance Contract

Prudential Insurance Co v IRC [1904] 2 KB 658

1. Must provide some benefit for the insured on the occurrence of some event
2. The occurrence must involve some element of uncertainty
3. The uncertain event should be one which is prima facie adverse to the interest
of the assured

A. Policy providing a Legal Entitlement to Benefit upon Occurrence of

Event
Medical Defence Union v Department of Trade [1979] 2 All ER 421

B. Uncertainty
 cannot insure certain events eg. deterioration of perishable goods, wear
and tear

• risk must be outside the control of insurer

• generally the insured cannot recover by reason of his own intentional
wrongdoing but negligence generally not a hindrance unless specifically
excluded by policy
Gray v Barr [1971] 2 QB 554
Dunbar v Plant [1997] 4 All ER 289

C. Insurable interest (Adversity)

Where the assured is so situated that the happening of the event on which the
insurance money is to become payable would, as a proximate cause, involve the
assured in the loss or diminution of any right recognised by law (1st party
insurance), or in any legal liability (3rd party insurance), there is an insurable
interest.

Life insurance: financial interest in the life insured unless it is your own life or that
of your spouse or partner

Reason for requirement

• to define insurance contracts – distinguish it from gambling

contracts and other commercial risk transfer products for regulatory
purposes (Law Reform: ‘indemnity insurance can be distinguished from
betting... without preserrving the doctrine of insurable interest’)

distinction between pure risk (loss is the only possible outcome

of the event in question) and speculative risk (the event in
question may bring about gain or loss)

• to prevent ‘ a mischievous kind of gaming’ – re taking out

insurance on the lives of strangers

‘The duration of lives of persons believed to be on their

death bed was a common hazard, and the dissolution of
persons, who saw themselves insured in the public papers at
90%, was, not unlikely, hastened by such announcement’
‘Finally there is a strong possibility that if the only interest of
X in Y is an insurance policy there may be a temptation on
the part of X to expedite Y’s demise.’ (R Hodgin, Insurance
Law - Text and Materials, 1998, 86)

(Law Reform: ‘Our preliminary view is that the

doctrine of insurable interest in life insurance should
 be retained... In relation to indemnity insurance, the
issues of moral hazard and gambling in the guise of
insurance are less important.... because [of] the
indemnity principle.’)

Timing – at the time of policy or at the time of loss?

Life insurance and other contingency insurance:

• s. 1 of the Life Assurance Act 1774 (at the time of policy; otherwise policy
null and void)

• at the time of loss: no

Indemnity Insurances

• s.18 of Gaming Act 1845: contract void as a contract of wager if at

the time of the contract the insured has no interest in and no expectation
of acquiring an interest in the subject-matter of the contract still applicable
to all insurance But: s. 335 of the Gambling Act 2005: ‘the fact that a
contract relates to gambling shall not prevent its enforcement’

• at the time of loss: indemnity principle

What amounts to an insurable interest?

Life insurance and other contingency insurances

Husband, wife, children, other family members, debtors, employees???

s.2 requires the names of the insured and all the beneficiaries to be
listed in the life policy (Law Reform: unnecessary technicality)

Indemnity Insurance eg. Property Insurance

Macaura v Northern Assurance Co Ltd [1925] AC 619

‘a right in the property, or a right derivable out of some contract about the
property, which in either case may be lost upon some contingency affecting the
possession or enjoyment of the party’ Lucena v Crauford (1806) 2 Bos & PNR
269, 321 - But NOWb s.335 of the Gambling Act 2005

Contrast:
Australia: s.17 Insurance Contracts Act 1984
Canada: Constitution Insurance Co of Canada v Kosmopoulos 34
DLR (4th) 208
Many US jurisdiction adopted: ‘factual expectancy test’
 Lack of insurable interest where it is required and consequences

Life insurance: policy null and void and premiums not returnable – policy is
illegal (Law Reform: ‘overly harsh. In the absence of fraud, we would
expect that the policy holder should have their premiums returned.’)

Third Parties/Group Insurances

Hepburn v A Tomlinson (Hauliers) Ltd [1966] AC 451 – whether the

interest a TP is covered by the policy depends on the construction of the
contract

Can the 3rd party enforce the insurance policy directly?

• agency: disclosed agency and undisclosed agency

Siu Yin Kwan v Eastern Insurance Co Ltd [1994] 2 AC 1999
• Contract (Rights of Third Parties) Act 1999
http://www.hmso.gov.uk/acts/acts1999/19990031.htm

3rd party liability insurance: what happens if the assured is insolvent

• TP (Rights Against Insurers) Act 1930: TP can bring action against

insurer directly (TP not mere creditor of insolvent assured) But must
establish liability of assured first
• Law Commission, Third Parties - Rights Against Insurers (2001)
http://www.lawcom.gov.uk/docs/lc272(1).pdf (150 pp) recommends repeal
of above Act; proposed Bill (272) at
http://www.lawcom.gov.uk/docs/272bill.pdf )
• A Lord Chancellor's Department Consultation Paper ‘Third Parties –
Rights Against Insurers’ A Consultation Paper on the implementation of
the Joint Law Commission and Scottish Law Commission Report 'Third
Parties - Rights Against Insurers' (September 2002)

3. Contract of Utmost Good Faith (UBERRIMAE FIDEI)

Marine Insurance Act 1906

http://www.jus.uio.no/lm/england.marine.insurance.act.1906/

A. Pre-Contract
pre-contractual duties: (1) not to misrepresent material facts and (2) to disclose
material facts
 contrast ordinary contracts: caveat emptor (buyer beware)
Breach of those duties: insurer can avoid policy ab initio (avoidance
normally requires restitution i.e. the parties are restored to the position
they were in prior to the contract being made)

Non-Disclosure

‘Insurance is a contract upon speculation. The special facts, upon which the
contingent chance is to be computed, lie most commonly in the knowledge of the
insured only: the under-writer trusts to his representation, and proceeds upon the
confidence that he does not keep back any circumstance in his knowledge, to
mislead the under-writer into a belief that the circumstance does not exist, and to
induce him to estimate the risqué as if it did not exist.’ Carter Boehm (1766) 3
Burr 1905, 1909.
Is this still the case today? Are insurers still as vulnerable as they were
250 years ago?

Woolcott v Sun Alliance and London Insurance Ltd [1978] 1 WLR 493
duty on the insured to disclose all facts as a reasonable or prudent insurer
might have treated as material (objective test)
test not:
· what the insured actually believed to be material (ie. acted honestly)
· what a reasonable insured would have believed to be material
· what the particular insurer would regard as material

BUT: Roselodge Ltd v Castle [1966] 2 Lloyd’s Rep 113

Reynolds v Phoenic Assurance Co [1978] 2 Lloyd’s Rep 440

moral and physical hazards

But: Rehabilitation of Offenders Act 1974

Discrimination: On what basis are insurers allowed to discriminate?

Sex Discrimination
• Sex Discrimination Act 1975: general duty not to discriminate
on the basis of sex
• s.45 provides an exception for insurers: different treatment
on the basis of sex is not unlawful where the treatment was
affected by reference to actuarial or other data from a source on
which it is reasonable to rely and it was reasonable to have regard
to the data and any other relevant factors
Pinder v Friends Provident (1985) 5 EOR 31

Race Discrimination
 • Race Relations Act 1976: it is unlawful to discriminate
against a person by refusing to deal with them on equal terms, or at
all, on the basis of their race
• Includes insurance s.20(2)©
• Prohibition irrespective of any scientific or medical date to
support unequal treatment
•
What about DNA results? Predictive Genetic Tests
Disability Discrimination?
· s.19 of the Disability Discrimination Act 1995: unlawful for a
provider of services to unjustifiably discriminate against a
disabled person
· Disability??? – narrow definition: (1) a physical or mental
impairment and (2) substantial and long term adverse effect on
the ability to carry out normal day-to-day activities
Common law?
· have to disclose all material facts
Questions
· Can insurers compel applicants to undergo a genetic test?
· How can predictive genetic tests be used by insurers?
· How reliable are the results?
ABI’s Code of Practice for Genetic Tests (June 2008)
http://www.abi.org.uk/Information/Codes_and_Guidance_Notes/416
97.pdf
Concordat and Moratorium on Genetics and Insurance (initially
agreed with Gov in 2001; latest: March 2005)
http://www.abi.org.uk/Information/Codes_and_Guidance_Notes/528
.pdf
·
Misrepresentation
insurer can avoid liability on the basis of a material misrepresentation
• Innocent?
• Negligent?
• Fraudulent?

Relevant to Both Misrepresentation and Non-Disclosure

(1) Materiality
s. 18(2) and 20(2) of Marine Insurance Act 1906
a fact is material for the purposes of both non-disclosure and
misrepresentation if it is one ‘which would influence the judgment of a prudent
underwriter in fixing the premium, or determining whether he will take the risk’

Pan Atlantic Insurance Co ltd v Pine Top Insurance Co Ltd [1995] 1 AC 501
 • A material fact is one that would have an effect on the mind
of the prudent insurer in assessing the risk; it is not necessary that
it would have a decisive effective on the insurer’s acceptance of the
risk or on the amount of the premium charged
• BUT: the insurer can only avoid the policy (rather than merely reject
the claim) if the material misrepresentation or non-disclosure induced the
insurer to enter into the policy on the terms

BUT
Cannot/need not disclose facts which
· diminish the risk
· the insurer knows/presumed to know or which are common knowledge
· are waived by the insurer
· you are not aware of
Constructive knowledge
s.18(1) of the Marine Insurance Act: ‘the assured is deemed to know every
circumstance which, in the ordinary course of business ought to be known by
him.’

(2) Opinion or Beliefs

s.20 of the Marine Insurance Act 1906: a representation as to a matter of
expectation or belief is true if it be made in good faith

Economides v Commercial Union Assurance Cp plc [1997] 3 ALL ER 636

B. Terms of the Insurance Contract

Warranties - How are they created & what is their effect?
Bank of Nova Scotia v Hellenic Mutual War Risks Association (Bermuda) Ltd ,
The Good Luck [1992] 1 AC 233
Dawson Ltd v Bonnin [1922] 2 AC 412
Conn v Westminster Motor Insurance Association Ltd [1966] 1 Lloyd’s Rep 407

BUT
(1) Warranty as to Past/Present Fact

(2) Clause Descriptive of the Risk

Farr v Motor Traders’ Mutual Insurance Society [1920] 3 KB 669

(3) Court not bound by Description/Labelling

Kler Knitwear Ltd v Lombard General Insurance Co Ltd [2000] Lloyd’s Rep IR 47

(4) Multi-Section Policy

Printpak v AGF Insurance Ltd [1999] Lloyd’s Rep IR 542

(5) Consumer Insurance Policy

see Statement of General Insurance Practice
(6) Term was condition precedent and not a warranty
see also
Alfred McAlpine plc v BAI (Run off) Ltd [2000] 1 Lloyds’s Rep IR 352

Exclusion Clauses
contra preferentem
Houghton v Trafalgar Insurance Co Ltd [1954] 1 QB 247

Making a claim
(1) condition precedent, mere condition, innominate terms

On innominate terms: Alfred McAlpine plc v BAI (Run off) Ltd [2000] 1 Lloyds’s
Rep IR 352
Friends Provident Life and Pensions v Sirius International Insurance
[2005] 2 lloyd’s rep 517, [2005] EWCA Civ 601

Case 39/2 heard by Financial Ombudsman

Newletter (August 2004) http://www.financial-
ombudsman.org.uk/publications/ombudsman-news/39/abi-39.htm

(2) onus of proof

To what extent do the principles of the FSA alter the strict legal rights of insurers
vis-a-vis consumers?
See http://www.fsahandbook.info/FSA/html/handbook/ICOBS

THE INSURER
Mutual Duty of Disclosure: The Insurer’s Duty
Banque Fianciere de la Cite v Westgate Insurance Co Ltd [1990] 1 QB 665,

Doctrine of Subrogation
Lister v Romford Ice & Cold Storage Co Ltd [1957] AC 555