Understanding Insurance Contracts

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Questions and Answers

What is the primary obligation of the insurer regarding the information provided by the proposed insured?

The insurer can refuse coverage if the information is incomplete.

The insurer should transmit the information correctly as provided by the agent. (correct)

The insurer is entitled to cancel the policy without any prior notice.

The insurer must verify all information before issuing a policy.

When can an insurer exercise the right of rescission?

When the insured's claims exceed the policy limits.

When there is a minor discrepancy in the submitted application.

When material information was not communicated and is within the knowledge of the proposed insured. (correct)

When the insured fails to renew the policy each year.

What does a promissory warranty typically entail in an insurance policy?

A promise that all statements in the application are true.

A guarantee that the insured has a valid driver's license.

A requirement that the insured will maintain books in a fire-proof safe. (correct)

An assurance that the insured will pay the premium on time.

In the context of insurance, what is subrogation?

The insured's right to recover compensation from a guilty party after being indemnified. Signup and view all the answers

What is the consequence if a common law warranty is not complied with?

The insurer can cancel the policy. Signup and view all the answers

What is the consequence of failing to pay a premium before the materialisation of risk?

The claim will be denied. Signup and view all the answers

What constitutes a material fact that must be disclosed to an insurer?

Circumstances that could affect the insurer’s decision. Signup and view all the answers

When must the duty to disclose material facts be fulfilled?

Upon taking out insurance and at every renewal. Signup and view all the answers

Which of the following describes an insurable interest?

A personal stake in preventing the occurrence of risk. Signup and view all the answers

What should an insured not disclose when applying for insurance?

Facts that are known to the insurer. Signup and view all the answers

What is the primary purpose of an insurance contract?

To protect the insured from financial loss due to uncertain events. Signup and view all the answers

Which of the following best defines the concept of non-indemnity in insurance?

Payment that doesn't depend on the amount of loss. Signup and view all the answers

Which of the following is a type of insurance according to peril?

Comprehensive motor vehicle Signup and view all the answers

What must an insurance policy include when issued?

Particulars of the insured, subject matter, and hazards. Signup and view all the answers

What role does the duty of an insured to disclose material facts play in insurance?

It protects the insurer from fraudulent claims. Signup and view all the answers

Which of the following is not a characteristic of material risks?

Always significant enough to warrant a claim. Signup and view all the answers

What is a potential invalid term in an insurance contract?

The insured waiving rights granted under relevant insurance acts. Signup and view all the answers

What relationship does a broker have with the insured?

An intermediary role requiring reasonable care and skill. Signup and view all the answers

Which act provides statutory control over insurance brokers?

Financial Advisory and Intermediary Services Act Signup and view all the answers

What is typically required of the insured when a dispute arises regarding claims?

They may need to meet with arbitration to resolve the issue. Signup and view all the answers

What is an example of a non-indemnity insurance policy?

Life insurance Signup and view all the answers

Study Notes

What is an Insurance Contract?

An insurance contract is an agreement where one party (the insurer) promises to pay a sum of money or provide compensation to the insured in exchange for premium payments.
This payment is triggered by a specific, uncertain event in which the insured has an interest.

Types of Insurance

According to Peril (Risk): Comprehensive motor vehicle, fidelity policy, life policy.

Formation of the Insurance Contract

Parties: Insured, insurer, and potentially a third party.
Formalities: No specific formalities are required, but the contract is usually reduced to writing.
Contract Formation: The process typically involves the submission of a proposal form by the insured and the issuance of a policy by the insurer.
- Proposal Form (Offer): Includes details about the person, subject matter, hazards, insurance history, and financial status. These details should be truthful and warrant the risk being insured.
- Issuing of Insurance Policy (Acceptance): The insurer's acceptance of the proposal form creates a binding contract.

Invalid Terms in Insurance Contracts

Insurer Exemption from Agent Liability: Terms exempting the insurer from liability for the actions of its agent are invalid if the agent was actually acting on behalf of the insured.
Waiver of Insured Rights: Terms compelling the insured to waive rights under the Long-Term Insurance Act or the Short-Term Insurance Act are invalid.
Compulsory Polygraph Tests: Requiring the insured to undergo a polygraph test is invalid.
- Policyholder Fails Test: If a policyholder fails a polygraph test, the claim can be rejected.
- Inducement of Testing: Inducing the insured to undergo a polygraph test is also considered invalid.
Arbitration Clauses: Clauses limiting dispute resolution solely to arbitration are invalid. Parties can still agree to arbitration after a dispute arises.

The Role of the Broker

Intermediary: The broker acts as an independent intermediary between the insured and the insurer.
Relationship with Insured: The relationship between the insured and broker is typically a mandate, requiring the broker to exercise reasonable care and skill.
Relationship with Insurer: The insurer pays the broker a commission once a contract is concluded.
Statutory Control: Brokers are subject to the Financial Advisory and Intermediary Services Act, which requires them to have a license and adhere to specific codes of conduct.

Elements of Insurance

Payment of Premium: Premiums are essential for insurance coverage.
- Grace Period: A grace period may be offered, allowing the insured to pay premiums after the due date without losing coverage.
- Reciprocal Obligation: The insured's payment of premiums is a reciprocal obligation to the insurer's promise of coverage.
- No Premium, No Cover: Coverage is only provided if premiums have been paid before the risk materializes.
Promise by Insurer to Pay: The insurer promises to pay the sum of money or provide its equivalent in the event of a covered loss.
- Indemnity: In indemnity insurance, the insurer aims to restore the insured to the financial position they were in before the loss.
- Non-Indemnity: In non-indemnity insurance, the insurer provides a payment that is not necessarily linked to the actual financial loss.
Materialization of Risk: The risk must materialize for insurance to be activated.
- Possibility of Harm: Insurance transfers the possibility of harm from the insured to the insurer.
- Future and Uncertain: The risk must be future and uncertain.
- Description of Risk: The policy specifies the object of insurance, perils covered, limitations on the risk, exceptions to coverage, and limits on liability.
Insurable Interest: There must be an insurable interest for a valid insurance contract.
- Interest in Preventing Risk: The insured must have an interest in preventing the risk from materializing.
- Indemnity Interest: If the interest is indemnity-based, it must be present when the risk materializes. This means the insured would incur a financial loss or miss out on anticipated financial benefits.
- Non-Indemnity Interest: In a non-indemnity contract, the interest must exist when the contract is concluded. Examples include interest in one's own life, health, and body, or the life, health, or body of a spouse or parents.

Duty of the Insured to Disclose Material Facts

Material Facts: The insured is required to disclose all material facts that could influence the insurer's assessment of the risk. These are facts that could affect the insurer's decision regarding coverage or the premium amount. - Examples: Higher susceptibility to danger, culpable conduct, financial problems or poor financial history, poor insurance record.
Mala Fides: Failing to disclose material facts in bad faith may result in the insurer avoiding liability.
Reasonableness Standard: A fact is considered material if a reasonable person would consider it important.
Exceptions: The insured is not required to disclose: - Facts that do not affect or lessen the risk. - Facts that are generally known. - Facts that the insurer knows or ought to know. - Facts the insurer has expressly or tacitly waived the right to be informed about.
Types of Knowledge: - Actual Knowledge: Personal knowledge of the facts. - Constructive Knowledge: Knowledge that the insured should have obtained through reasonable business inquiries.
Time of Disclosure: The insured must disclose material facts when taking out insurance and at each renewal.
Disclosure to Insurer's Agent:
- Agent's Authority: The insured can assume the agent has authority to act on behalf of the insurer. - Transmission of Information: The insured is entitled to expect the agent to transmit all information accurately.
Insurer's Right of Rescission:
- Voidable Contract: The insurer has the right to rescind (cancel) the contract if the insured failed to disclose a material fact. - Insurer's Onus: The insurer must prove the following to justify rescission: - The fact must be material. - The fact must have been within the knowledge of the proposed insured. - The fact must not have been communicated to the insurer or its agent. - Restoring Premiums: If the insurer elects to rescind, the premiums must be returned to the insured.

Warranties

Affirmative and Promissory Warranties: - Affirmative Warranty: An undertaking that a specific state of affairs exists at the time the contract is concluded. - Promissory Warranty: An undertaking that a state of affairs will continue to exist during the policy period. - Common Law: At common law, the insurer could cancel the policy for breach of warranty.
Statutory Protection of Insured: - The courts have limited the insurer's rights to cancel policies for breach of warranty. - Jordan v New Zealand Insurance Co: The court ruled that the breach must be material and affect the risk assessment. - Premium Adjustments: The insurer can adjust the premium if the insured misrepresented their age or other factors that affect the premium.

Duties of the Insurer - Compensating the Insured

Insurer's Liability: The insurer is liable to pay out if the insured: - Makes a claim. - The risk insured against materializes. - The insured has complied with the policy's requirements. - The insurer is not excused from liability by any applicable exceptions.
Extent of Liability: The insurer's liability is generally limited to the extent outlined in the policy.

Subrogation

Insurer's Rights: The insurer who has compensated the insured for a loss has the right to exercise all of the insured's legal remedies against the person who caused the loss.
Preventing Enrichment: Subrogation prevents the wrongdoer from benefiting from the fact that the victim was insured.
Preventing Unjust Enrichment: Subrogation also prevents the insured from being unjustly enriched at the expense of the insurer.

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Description

This quiz explores the fundamentals of insurance contracts, including their formation, different types, and key parties involved. Gain insight into the intricacies of agreements between insurers and insured parties. Perfect for students studying commercial law or related fields.