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Insurance Law 1.1. Introduction to Insurance 1.2. Definition of Insurance 1.3. Constitution of the Contract of Insurance 1.3.1. Constitution of the Contract of Insurance – Insurable Interest 1.3.2. Constitution of the Contract of Insurance – The Indemnity Principle 1.3.3. Constitution of the Contract of Insurance – Proximate Cause 1.3.4. Constitution of the Contract of Insurance –Uberrimae Fidei 1.3.4.1. The Duty of Good Faith and Consumer Insurance Contracts 1.3.5. Constitution of the Contract of Insurance – The Continuing Duty of Good Faith 1.4. Warranties 1.5. Event Insured 1.6. Average 1.7. Contribution 1.8. Third Parties (Rights Against Insurers) Act 1930 1.9. Part XV of the Financial Services and Markets Act 2000 1.10. Insurance Intermediaries 1.11. Possible Futureƒ Reforms
3. Section Three – Insurance Law
Insurance underpins virtually all commercial activities and many personal ones. Insurance is also a very important commercial activity, employing in the United Kingdom about the same number of people as live in Edinburgh. Without an effective system of insurance, the risk involved in pursuing particular commercial (e.g. air transport) and personal (e.g. motor vehicle driving) activities would be too great. There have been some recent changes to insurance law, particularly in terms of the Consumer Insurance Act xyz which is not covered in many textbooks (although it is covered in the Davidson and McGregor text). o The reason for some of these changes is a joint consultation by the Law Commissions of Scotland and England. great number of joint scoping papers, joint issues papers and joint consultation papers have been issued since 2007 – see http://www.scotlawcom.gov.uk/law- reform-projects/joint-projects/insurance-law/ and http://www.lawcom.gov.uk/insurance_contract.htm. In particular, the final report issued in December 2009 – Consumer Insurance Law: Pre-Contract Disclosure and Misrepresentation (Law Com No. 319, 2009) (Scot Law Com No. 219, 2009) formed the basis of the Consumer Insurance (Disclosure and Representations) Act 2012 which came into force on 6 April 2013. The Insurance Bill is also currently being considered by the House of Lords.
3.1 Introduction to Insurance
Insurance can be a contract of indemnity or life assurance, the former restricting the amount obtained up to the sum insured and only the actual loss. Thus there are two main kinds of contract of : o 1. Indemnity insurance - the insured is indemnified against loss, damage or destruction suffered, e.g. motor insurance, fire insurance, theft insurance, marine insurance, building and contents insurance, etc. The event is uncertain to occur. o 2. Life assurance - the insured event, i.e. death, is certain to occur. However, the precise timing of the death is uncertain. This is not a contract of indemnity. With a couple of exceptions Scots and English Law on insurance are identical: o The Marine Insurance Act 1906 applies in both jurisdictions. This Act codified the common law and the great majority of the principles set out in the Act apply equally to non-marine insurance. Thus it forms a model for consistency of law across England and Scotland. o The Consumer Insurance (Disclosure and Representations) Act 2012 applies to consumer insurance contracts in England, Wales and Scotland. Insurance is designed to provide safeguards in the event of misfortune or the occurrence of a risk. A key element in the practice of insurance (as it is differentiated e.g. from contracts of gaming and betting) is the spreading of the losses of the few who actually incur them amongst the many who buy the coverage. o Another principle differentiating insurance contracts from others is that there is an insurable risk. o The key to understanding insurance law is to remember that the insured knows much more about the risk he wishes to have insured, and the perils to which it is subject, than the insurer.
“It appears that a contract is a contract of insurance if three elements are present…First, the contract must provide that the assured will become entitled to something on the occurrence of some event…Secondly, the event must be one that involves some uncertainty…Thirdly, the assured must have an insurable interest in the subject-matter of the contract.
o The “benefit” must be a sum of money or an equivalent service measurable in financial terms. In Department of Trade and Industry v St Christopher’s Motorists Association members paid an annual subscription to an association which would provide a chauffeur for 12 months if the member was unable to drive, had been disqualified from driving or was injured. The court in this case ruled that there was a contract between the two parties, with the benefit provided thereby able to be valued in money’s worth. This benefit would only be conferred if an uncertain event occurred. Thus the contract had all of the characteristics of insurance and so was a contract of insurance. o Furthermore, the right to receive the benefit under the insurance contract must be certain ( per Medical Defence Union v Department of Trade ). In this case, the MDU had around 80, members who paid a subscription. The MDU provided them in return with advice and assistance of various types. The constitution of the MDU allowed, subject to the approval of the management committee, to defend practitioners in medical negligence proceedings as well as indemnifying against damages payments. It was the MDU’s universal, but not automatic practice, to provide such support when professional negligence proceedings were raised. The court found that this was not a contract of insurance. The contract must provide that the beneficiary will be entitled to something on the happening of the uncertain event (although the event itself can be uncertain). The benefit must be certain and capable of being assessed in money or money’s worth. As the benefit here was provided on a discretionary basis, the instant contract could not be a contract of insurance.
3.3 Constitution of the Contract of Insurance
Most of the general contractual principles apply to contracts of insurance. Writing is not required for the constitution of an insurance contract ( per s.1 of the Requirements of Writing (Scotland) Act 1995). However s22 of the Marine Insurance Act 1906, provides that a marine insurance policy is inadmissible in evidence unless it is embodied in written form. Note the following four elements of the insurance contract o 1. Insurable interest o 2. The indemnity principle o 3. Proximate cause o 4. The utmost good faith ( uberrimae fidei )
3.3.1 Constitution of the Contract of Insurance – Insurable Interest
The insured must have an insurable interest in the subject matter of the insurance. A cannot insure B’s car as they will not in principle suffer loss. The Life Assurance Act 1774 s.1 provides as follows:
“From and after the passing of this Act no insurance shall be made by any person or persons, bodies politick or corporate, on the life or lives of any person or persons, or on any other event or events whatsoever, wherein the person or persons for whose use, benefit, or on whose account such policy or policies shall be made, shall have no interest, or by way of gaming or wagering; and that every assurance made contrary to the true intent and meaning hereof shall be null and void to all intents and purposes whatsoever.”
o This was to prevent the practice of taking out an insurance policy over another and, in essence, betting on when they would die. The Act also restricts the value of policies which may be taken out over the lives of others. o The 1774 Act is important in that it imposes strict limits on who can insure the life of a third party, and also restricts the value of policies taken out by insureds on the lives of others. o It necessary to prove that the insured would suffer direct financial loss in the event of death of the life insured, and that the recovery under the policy will not exceed the insured’s pecuniary interest in the continuation of the life insured. o The Married Women’s Policies of Assurance (Scotland) Act 1880 provides inter alia : At section 1 – A married woman can effect a policy of assurance on the life of her husband. At section 2 – The proceeds of a policy effected by a married man or woman on their own lives for the benefit of their children are deemed to be held in trust for the benefit of the children. o The Marine Insurance Act Section 5 provides as follows:
“(1) Subject to the provisions of this Act, every person has an insurable interest who is interested in a marine adventure.
(2) In particular a person is interested in a marine adventure where he stands in any legal or equitable relation to the adventure or to any insurable property at risk therein, in consequence of which he may benefit by the safety or due arrival of insurable property, or may be prejudiced by the loss, or damage thereto, or by the detention thereof, or may incur liability in respect thereof.”
o The following cases illustrate the extent of insurable interest: In Macaura v Northern Assurance Co Limited an individual took out an insurance policy over his property. He was the sole shareholder of a limited company which owned considerable amounts of timber. o The timber was destroyed by a fire and the claimant’s claim was refused. They had no insurable interest as the asset belonged to the company – only the company had insurable interest. o Lord Sumner said that the accused stood in no legal or equitable relationship with the timber. Only the company’s interest was prejudiced by the fire. o Thus only if a legal person is the person In Cowan v Jeffrey Associates Cowan was the director and sole shareholder of a company. The company owned premises, with the insurance against fire in Cowan’s name. The judge stated that he was bound by Macaura and Cowan had no insurable interest. The contract was void. In Mitchell v Scottish Eagle Insurance Co. Ltd it was ruled that the only insurable interest in a partnership was the partnership’s(??)
“valued” policy where the parties agree that a fixed amount will be paid. Valued policies are quite rare outside the fine art and marine insurance markets. o The indemnity principle provides that an insured can only receive from the insurer the amount which he has lost. Over-insurance will do the policyholder no good. Where the insured item is damaged (a partial loss) the insurer is required to pay for the cost of its repair to its pre-damaged condition. An insurer will not repair damage not caused by the loss event. Where repairs are not carried out the standard measure of indemnity is the second hand value of the object in its pre-damaged condition. It is possible to insure for “replacement as new”, but that will cost more. Where the insured object is totally destroyed, the value of the insurance payment is the pecuniary loss. o A further effect of the indemnity principle is that the insured may not recover twice if he has two policies taken out across the same asset. One insurer in this instance would pay out, with the other insurer requiring to If there is a rateable contribution clause in the contract of insurance, each insurer must seek recovery from the others up to their pro-rata share of the insured thing. In life assurance, it is possible to assure one’s life as many times as one wishes with as many policies as one wishes. It is not permissible to insure the life of another person for a value beyond the loss will be if they die ( Life Assurance Act 1774, section 3. ) o In Leppard v Excess Insurance Co Ltd a person purchased a dilapidated home and insured it for £10,000 if it is totally destroyed. The insured hoped to sell off the property, increasing the insurance policy by £14,000. o The property was totally destroyed by the fire, with the insured claiming the rebuilding cost. The company stated that it would give £3000 as this was the agreed value of the property. The Court of Appeal held that the loss was the market value of the cottage, as this was what the insured lost by not being able to sell it. o The court did recognise, however, that in the normal case of the insured who lives in, or otherwise occupies, his home, office or factory, the measure of indemnity will be the cost of rebuilding because otherwise the actual loss will not be made good. o In English law, the right to indemnity is in legal terms the equivalent to a claim for unliquidated damages for breach of contract - it arises at the time of the loss event and not at the time when the insured makes a claim or the insurer wrongfully refuses to pay. In English law, the indemnity principle extends to denying the insured any ability to claim damages from the insurer for consequential losses flowing from the insurer’s failure promptly to pay a valid loss. In Sprung v Royal Insurance there was a breakin – the insured tried to make a claim on their policy and the insurer handled the claim badly. Eventually, the insurance company allowed a judgement to be taken against them four years after the occurrence of the loss. The insured sought damages for the financial consequences of the company’s failure to deal with the loss properly or fairly. The Court of Appeal ruled that the payment of an insurance policy was equivalent to a claim in damages. Thus the only thing which could be claimed for dealing slowly with the claim was judicial interest.
o If this case had taken place north of the border, the decision would have been different. In Scots law, paying the claim of the assured is seen in law as the performance of a contractual obligation ( Scott Lithgow Ltd. v Secretary of State for Defence and Strachan v Scottish Boatowners’ Mutual Insurance Association ). Consequently , Scots law will allow a damages claim for late payment. o There are two sub-principles which flow from the principle of indemnity – subrogation and salvage. 1. Subrogation - Subrogation is the right of an insurer who has fully indemnified the insured to stand in the shoes of the insured and to exercise (in the insured’s name) all rights that the insured could have exercised himself to recover from any source other than the insurers the whole or part of the financial loss he has sustained and for which he has been indemnified. If there is a car accident caused by A which harms B. The insurer of B is then able to raise proceedings in delict against A for the sums paid to B. The insurer is said to be subrogated. The principle of subrogation can be relatively wide. In Castellain v Preston , buildings were destroyed by fire before the completion of missives. The vendor of property was insured, with the insurance company paying out the full cost of the damage as well as gaining the full purchase price. o The insurers then raised an action against the insured defender, the question for the court being whether the insuerer was subrogated to the right of the insured to receive the full purchase price. o The court was clear that the contract was one of indemnity and the indemnity principle was such that only the full purchase price was subject to insurance. Otherwise, the court stated, the vendor could have made a double recovery. o However, there would have been no right of subrogation if the vendor were accountable to a 3rd^ party to e.g. rebuild the damaged property ( Lonsdale & Thompson Limited v Black Arrow Group Plc ) In Caledonia North Sea Limited v London Bridge Engineering Limited it was ruled that an insurance company subrogated to an insured required to raise proceedings against 3rd^ parties in the name of the insured to which they are subrogated. The right of subrogation applies “from the top down” – Lord Napier & Ettrick v Hunter – insurers, having indemnified the insured up to the limit of their policy, are entitled to their remedy out of funds received by the insured from a third party even though the insured’s loss might be greater than the sum insured. Subrogation is not available to contingency insurers – as such the life insurers of a person killed in a car crash cannot claim against the person responsible for the crash. 1. Salvage –If an insurer has paid a total loss then the wreckage of the insured object, if the insurer so wishes, becomes his property, and he is entitled to retain whatever he
Insurance contracts are (currently) contracts uberrimae fidei (i.e. of the utmost good faith). This statement now requires to be modified in relation to consumer insurance contracts following the entry into force of the Consumer Insurance (Disclosure and Representations) Act 2012 (“the 2012 Act”) which came into force on 6 April 2013^1. o The following are the rules for commercial insurance contracts. Section 17 of the Marine Insurance Act 1906 states:
“A contract of Marine Insurance is a contract based upon the utmost good faith, and, if the utmost good faith be not observed by either party, the contract may be avoided by the other party.”
The duty of good faith lies upon the insured before the creation of the contract of insurance. It has three further components: o 1. The duty of disclosure (modified in relation to consumer insurance contract).In commercial insurance contracts, the duty of disclosure on the insureds is a duty to disclose all material facts that would influence the judgment of a prudent underwriter ( per Joseph Fielding Properties (Blackpool) Ltd. v Aviva Insurance Ltd ). The duty exists at negotiation stage, until the contract is formed and when the policy comes up for renewal. Contrast this with duties of disclosure which continue as long as a relationship (e.g. directors and companies). The insurer is also under a duty to disclose. Such a duty arises in relation to facts that are material to the nature of the risk insured or the recoverability of a claim under the policy which a prudent insured would take into account in deciding whether or not to take out cover with the insurer. In such circumstances, the duty to disclose can arise during the subsistence of the insurance contract. o What is the judgement of a prudent underwriter for these purposes? An example is given by s.16 of the Marine Insurance Act 1906, which states:
“(1) The assured must disclose to the insurer, before the contract is concluded, every material circumstance which is known to the assured, and the assured is deemed to know every circumstance which, in the ordinary course of business, ought to be known to him.
(2) Every circumstance is material which would influence the judgment of a prudent insurer in fixing the premium or determining whether he will take the risk.”
o There have been two interpretations of what is material here:
(1) Whether the undisclosed fact would have had a ‘decisive influence’ on the prudent insurer; or
(2) Whether the fact is one which would have had an ‘effect’ on the insurer’s mind
(^1) A consumer insurance contract is an insurance contract entered into between an individual who enters into the
contract wholly or mainly for purposes unrelated to the individual’s trade, business or profession (i.e. the consumer insured) and a person who carries on the business of insurance and who becomes a party to the contract by way of that business (i.e. the insurer): s.1. The 2012 Act and its effects are considered in detail below. We will first of all consider the main components of the duty of good faith in relation to non consumer insurance contracts (commercial insurance contracts).
o The second formulation was approved by the House of Lords (by a majority) in the case of Pan Atlantic v Pine Top Industries Co. Limited. There is no need for an insurer to prove that a prudent insurer would have acted differently had he known of the fact in question. o The insurer only requires to show that it was one factor the prudent insurer would have taken into account. This rule applies in relation to indemnity contracts in both Scotland and England, and in England applies to life assurance as well. The test in Scotland in the context of life assurance differs. It is more favourable to the insured. o In Life Association v Foster the insured was asked if she had a rupture. The insurance contract came into place; the insured died of a form of swelling strongly indicative of a rupture. The court ruled that the test here was what was material to the ‘prudent insured’. As the insured had no medical knowledge, the failure to disclosure here was not material. o In Hooper v Royal London General Insurance , Lord Justice Clerk Ross made it clear that this test only applied to life assurance. A recent attempt to argue that the prudent insurer test applied to cases of life assurance in Scotland as it does in England failed in the Outer House (Cuthbertson v Friends Provident Life Office) o The origin of the rule in relation to the disclosure of physical and moral hazards is Carter v Boehm. Here Lord Mansfield stated:
“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 underwriter trusts to his representation and proceeds upon confidence that he does not keep back any circumstance in his knowledge, to mislead the underwriter into a belief that the circumstance does not exist, and to induce him to estimate the risk as if it did not exist. The keeping back of such circumstance is a fraud, and therefore the policy is void. Although this suppression should happen through mistake, without any fraudulent intention; yet still the underwriter is deceived and the policy is void, because the risk run is really different from the risk understood and intended to be run at the time of the agreement”.
As well as proving that there was a material non-disclosure the insurer must also prove inducement – thus the non-disclosure must have induced the particular insurer to enter into the contract that he actually did (per Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd ). A rebuttable presumption will arise that the insurer has been induced to enter into the insurance policy as a result of the insured’s non-disclosure of material facts (per St. Paul Fire & Marine Insurance Co (UK) Ltd. v McDonnell Dowell Constructors Ltd ). It is thus important for the insurer to show inducement to shift the burden of proof. It is necessary in almost all forms of insurance to fill out an information form containing a ‘basis of contract clause’. The effect of this clause is to turn all the statements made in the proposal form into warranties operating as a condition precedent to the right of recovery from the insurer.
The insured’s parents moved in and brought with them jewellery. The insured sum was raised to £16,000. The jewellery was then valued at £31,000 and the contents at £41,000. The insurers sought to avoid the policy on the basis of non disclosure of material facts and misprepresentation. The Court of Appeal ruled that a representation should be a representation of belief – provided that it was made honestly (as it was in the circumstances) the accused was in good faith. There was no breach of the insurance contract. Followed by the Privy Council in of Zeller v British Caymanian Insurance Co. Ltd However, in McPhee v Royal Insurance a vessel was misdescribed – the dimensions were said to be bigger than they actually were. The accused had attempted to discover these dimensions by calling up the seller of the vessel. The proposal form required the declarations to be true to the best knowledge and belief of the insured. The court ruled that the phonecall to the seller was not evidence of sufficient diligence to constitute evidence of information to the best knowledge and belief of the insured. Not enough had been done by the insured to demonstrate that the answers were given to the best of his knowledge and belief. o If the insurer can prove that he was induced to enter into the insurance contract due to the misrepresentation he can avoid the contract – ( per Marine Insurance Act, s. 17(1) and 20(1) and Joel v Law Union & Crown Insurance Co). There is no right of damages. All sums paid out to the insured must be repaid to the insurer and the premiums returned/refunded by the insurer to the insured. The effect of misrepresentation is again thus more severe on the insured than the insurer. 3. The duty not to make a fraudulent claim (constant across both consumer and non-consumer insurance contract types). o Where an insured makes a fraudulent claim, the insurer is under no liability to meet that claim (per The Litison Pride ). Here the policy required the insured to notify the insurer if the insured was to be travelling through a war zone. The insured ship was sunk in a war zone and letters made out to the insurer ostensibly notifying them of this were shown to be forged. The court ruled that no claim was to arise. o However, note the courts attitude to a bit of exaggeration in a claim made for the purpose of negotiating settlement of the claim - Ewer v National Employers Mutual General Insurance Association. Here an overvaluation of contents was ruled not to be fraudulent but a legitimate opening gambit for the purposes of litigation settlement. o If there is a valid claim then a fraudulent claim, the subsequent fraudulent claim does not invalidate previous claims honestly made despite being a material breach of contract entitling the insurer to rescind the contract of insurance ( Fargnoli v G A Bonus plc ). o However, in English law, the legal position in this context is presently unclear.
3.3.4.1 The Duty of Good Faith and Consumer Insurance Contracts
The 2012 Act (which was in the statute book) made significant changes to the duty of disclosure and the duty not to misrepresent material facts in consumer insurance contracts. o A consumer insurance contract is an insurance contract entered into between an individual who enters into the contract wholly or mainly for purposes unrelated to the individual’s trade, business or profession (i.e. the consumer insured) and a person who carries on the business of insurance and who becomes a party to the contract by way of that business (i.e. the insurer): (s.1 2012 Act). Where the consumer insured and insurer enter into a consumer insurance contract, the common law duties of (a) disclosure and (b) not to misrepresent material facts, and the equivalent statutory duties in the Marine Insurance Act 1906 are replaced by a single duty which obliges the consumer insured to take reasonable care not to make a misrepresentation before the contract is formed or varied. o Any rule of law to the effect that a consumer insurance contract is one of the utmost good faith is modified to the extent required by the provisions of the 2012 Act: section 2. The standard of care to be discharged by the consumer insured is that of the reasonable consumer, unless the insurer was, or ought to have been, aware of any particular characteristics or circumstances of the actual consumer or the representation made by the consumer was dishonest ( per section 3(3), (4) and (5)). o Whether the insured has taken reasonable care not to make a misrepresentation is to be determined in light of all the relevant circumstances and the Act sets out some examples of factors that may need to be considered ( per section 3(1) and (2):
“(1)Whether or not a consumer has taken reasonable care not to make a misrepresentation is to be determined in the light of all the relevant circumstances.
(2)The following are examples of things which may need to be taken into account in making a determination under subsection (1) —
(a)the type of consumer insurance contract in question, and its target market, (b)any relevant explanatory material or publicity produced or authorised by the insurer, (c)how clear, and how specific, the insurer’s questions were, (d)in the case of a failure to respond to the insurer’s questions in connection with the renewal or variation of a consumer insurance contract, how clearly the insurer communicated the importance of answering those questions (or the possible consequences of failing to do so), (e)whether or not an agent was acting for the consumer” o The insurer will have a remedy where the consumer insured breaches the duty to take reasonable care not to make a misrepresentation and where without the misrepresentation the insurer would not have entered into the contract or would have done so only on different terms: section 4. A misrepresentation by the consumer insured can be (I) deliberate or reckless or (II) careless. o It will be deliberate or reckless if the consumer knew that (a) it was untrue or misleading, or did not care whether or not it was untrue or misleading and (b) the matter to which the misrepresentation related was relevant to the insurer or the consumer did not care whether or not it was relevant to the insurer ( per s.5)
The insurers failed to notify the bank, who had advanced further sums under the security which they would not have done had they known that the ship was not insured. The court found that the insurer was liable to the bank for the extra amount which had been advanced as they had a continuing duty of good faith to the bank as assignee of the insurance contract. By contrast, there is no common law duty on the insured, during the course of the policy (as opposed to the period prior to and at inception of the contract and at the time of renewal), to disclose to the insurer any circumstance that has developed since the inception of the policy and which increases the risk. However the policy may have a specific term requiring such disclosure to be made.
3.4 Warranties
‘Basis of the contract’ clauses generally elevate certain information given on a proposal form to the level of a warranty. A warranty is a fundamental term of the insurance contract. It is effectively a promise made by the insured, and must be strictly observed. There are two forms that a warranty can take: o 1. A statement of fact by the insured as to the past or present (‘a past or present fact warranty’), or o 2. A continuing undertaking that a state of affairs will prevail throughout the duration of the policy, which must be exactly complied with, whether it be material to the risk insured or not. (sometimes referred to as a ‘promissory’ or ‘continuing’ warranty.) To determine which kind of warranty is present, on the facts, the normal rules of interpretation apply. There is some difficult case law here: o 1. In Hussain v Brown the insured effected fire-protection insurance. In the proposal form which contained a basis of the contract clause, it was asked whether or not there was an intruder alarm. There was a fire and, at the time, the alarm was inoperative. The insured argued that the warranty was a past or present fact warranty and therefore there was no breach of warranty. The court agreed, finding on the basis of the wording of the question in the present tense that there was a past or present fact warranty only. o 2. In Ansari v New India Assurance Ltd a question asked on the proposal form was ‘are the premises protected by an automatic sprinkler system’? The insured answered yes. There was a fire when the sprinkler system was not operation and the insured argued that the warranty was a past or present fact warranty. In this case, the court distinguished Hussain. It found that the warranty was continuing:
“I do not think that any assistance is to be gained from Hussain v Brown. In that case it would have been difficult to read the warranty that the premises were fitted with an intruder alarm as containing by implication a continuing warranty that it would be maintained and put into operation whenever the premises were left unattended. Apart from anything else, such an interpretation could lead to a complete loss of cover as a result of a simple act of negligence on the part of the insured or his employees in failing to set the alarm.
The Court stated, then, that as a sprinkler system should always be on and therefore the warranty was continuing as to the operative state of the sprinkler system. This decision is questionable but would seem still to be law. o 3. In Kennedy v Smith the insured was a professed lifetime abstainer from alcohol. A statement in the proposal form was to the effect that the insured was a complete abstainer. He decided to drink after a boules match and drive his friends home. There was an accident. When the insurer disputed liability, the Inner House found that the warranty in the contract was a past or present fact warranty rather than a continuing warranty and, as true at the time of the constitution of the contract, was unbreached. The effect of a breach of warranty depends on whether it is classed as relating to past / present facts or future facts. o 1. If the breach is of past or present fact warranty the insurer avoids liability ab initio. o 2. If the breach is of a continuing warranty the insurer is discharged from liability from the date of the breach of warranty. However, the contract cannot be rescinded ( per The Good Luck ). Breach of a warranty allows the insurer to escape liability even if the breach is unconnected with the occurrence of any loss that occurs or the warranty is immaterial to the risk (section 33 of the Marine Insurance Act 1906 and (The Tiburon) o In The Tiburon a warranty was given that a ship would be of German flag or management. It was not. When the ship was sunk by a missile, the insurers were not to be held liable despite the loss and risk being unconnected with the breach of the material warranty. No particular form of wording is required to create a warranty but it must be clear that the parties intend the term to be a warranty. The Courts will try to mitigate the severity of the law in relation to breach of warranty by interpreting any ambiguity in the warranty contra proferentem. o Whilst the effect on the insured is said to be draconian in terms of the negative impact upon the insured, basis of the contract clauses continue to be upheld by the courts. The Insurance Bill will deal with this problem. o The reasons that basis of the contract clauses are still upheld by the courts was set out by the court in Unipac (Scotland) Ltd v Aegon Insurance Co (UK) Ltd. Here the courts found that the clauses are valid as a result of the principle of freedom of contract. o A draconian result of the kind discussed above is demonstrated by Dawsons Ltd. v Bonnin. Here the insured owned lorries and signed a proposal form with a basis of the contract clause. The insured accidentally wrote that the lorry was usually parked at the business address, while in actuality it was parked in the outskirts of Glasgow. The lorry was destroyed by fire and the insurer disclaimed liability. The court stated that, notwithstanding the lower risk of the locale in which the lorry was parked, the breach of warranty absolved the insurers of liability. In terms of section 6 of the 2012 Act ‘basis of the contract’ clauses will be of no effect in consumer insurance contracts.
3.5 Event Insured
The 1930 Act prevents this. The 1930 Act enables a third party who has a valid claim against an insured who has become bankrupt to proceed directly against the insurer, acting as a statutory assignation by the insured to the third party. o See e.g. Post Office v Norwich Union Fire Insurance Society Ltd where the court held that where the third party’s loss is illiquid or unascertained (e.g. where there has not been a judgement) then the third party must obtain the leave of court to sue the insured and only when there is a valid claim can there then be proceedings from the insurer. The Third Parties (Rights against Insurers) Act 2010 (which is not yet in force) will change some aspects of the law regarding a third part’s ability to seek direct recovery from the wrongdoer’s insurer. o When the 2010 Act comes into force, the third party will be able to initiate proceedings against the insurer without the liability of the insured being first ascertained. o The liability of the insured still requires to be found, although recompense from the insurer and the finding of this liability can be undertaken in a single set of proceedings.
3.9 Part XV of the Financial Services and Markets Act 2000
Part XV of the Financial Services and Markets Act 2000 (FSMA) provides protection for the insured where the insurer is unable to meet its liabilities, e.g. on insolvency. FSMA imposes levies on insurers in order to finance insurers’ liabilities and in some cases the insured will be indemnified in full when a claim is made against the Financial Services Compensation Scheme. o The relevant rules are contained within the Financial Conduct Authority Handbook and the Prudential Regulation Authority Handbook a combined view of both handbooks is available at http://fshandbook.info/FS/html/handbook/COMP/2. FSMA also enables the insured to make a complaint to the Financial Services Ombudsman regarding the insurer’s resolution of a dispute in relation to a claim. This Ombudsman right only relates to private individuals or a business which is a mico-enterprise (an enterprise with fewer than 10 employees and an annual turnover or annual balance sheet that does not exceed €2 million).
3.10 Insurance Intermediaries
Virtually all commercial insurance is arranged through intermediaries. Sometimes there are two or more intermediaries involved in the formation of the contract. Despite the growing importance of direct insurance done on the internet or by telephone a substantial amount of insurance to individuals is still put in place through intermediaries. The distinction to be drawn is that between an independent intermediary – a broker – who acts for the insured, and a tied agent who acts for the insurer. A tied agent is limited to selling the products of his principal. Both independent brokers and tied agents are usually rewarded by a commission. The obligations of the broker are o To satisfy himself as to the nature and value of the risk proposed for insurance; o To advise his client as to the most appropriate form of coverage; and o To negotiate with the insurer to secure the best terms available. A broker will also assist the insured in collecting any claim that may need to be made on the policy.
As a matter of general agency law, while the knowledge of a broker is imputed to his principal, it is certainly not imputed to the other party in the transaction. Important in relation to the duty of disclosure. o Again as a matter of general agency law a principal will be bound by his agent’s acts carried out within the scope of his actual or apparent (“ostensible”) authority. o There is often an element of dual agency involved in insurance contracts, as the broker will often act as the agent for the insurer in issuing cover notes while negotiating with the insured. o Only an agent acting under the direct employment or control of the insurer is an agent of the insurer. All other agents are agents of the insured. These are general rules which can depend on the facts and circumstances of the case. In Stockton v Mason and The Vehicle and General Insurance Co Ltd. Xxyy. The policyholder’s son had an accident and the insurer stated that it required further information before it could pay out. The court found that brokers had apparent authority in issuing cover notes and therefore were acting as agents of the insurer in effecting cover. In Newsholme Bros v Road Transport and General Insurance Co Ltd the insurance company’s agent filled out the proposal form. He was not authorised to fill out the proposal form by the insurer and filled out three of the fourteen questions wrongly. The insured had supplied the correct information and then signed the form. o It was held in this case that the broker was acting as agent to the insured and the insurer was entitled to avoid liability. The 2012 Act sets out rules for determining whether an agent is acting as an agent of the consumer insured or insurer – see section 9 and Schedule 2 of the 2012 Act. An intermediary will be the agent of the insurer when the agent: o 1. Does something in the agent’s capacity as the appointed representative of the insurer for the purposes of the Financial Services and Markets Act 2000 o 2. Collects information from the consumer insured if the insurer had given the agent express authority to do so as the insurer’s agent o 3. Enters into the consumer insurance contract as the insurer’s agent if the insurer had given the agent express authority to do so. In any other case, it is to be presumed that the agent is acting as the consumer’s agent unless, in the light of all the relevant circumstances, it would appear that the agent is acting as the insurer’s agent. Relevant factors which may tend to confirm that the agent is acting for the consumer are that: o 1. The agent undertakes to give impartial advice to the consumer o 2. The agent undertakes to conduct a fair analysis of the market o 3. The consumer insured pays the agent a fee. The following matters may tend to show that the agent is acting as the agent of the insurer: o 1. The agent places insurance of the type in question with only one of the insurers who provide insurance of that type o 2. The agent is under a contractual obligation which has the effect of restricting the number of insurers with whom the agent places insurance of the type in question o 3. The insurer provides insurance of the type in question through only a small proportion of agents who deal in that type of insurance
