Contract Law and Insurance Contracts
What this domain tests
This domain tests how an insurance contract is formed and the doctrines that decide whether a claim is paid. Expect questions on insurable interest, good faith, warranties and the remedies for misrepresentation.
Formation
A contract needs offer, acceptance, consideration, intention to create legal relations and capacity. In insurance the completed proposal is usually the offer; the insurer accepts by issuing the policy. A request for further information or a different premium is a counter-offer. Consideration is the premium, matched by the insurer's promise to pay valid claims.
Core insurance doctrines
- Insurable interest: life policies require interest at inception (Life Assurance Act 1774); indemnity policies require interest at the time of loss (Marine Insurance Act 1906 s.6).
- Indemnity: restore the insured to the pre-loss financial position, never profit. Valued and new-for-old policies are exceptions.
- Subrogation: after payment the insurer steps into the insured's shoes to recover from the third party. It cannot pursue its own insured for the loss (Morley v Moore), subject to limited exceptions.
- Contribution: where two policies cover the same interest, peril and period, liability is shared, usually rateably.
- Utmost good faith: now statutory. CIDRA 2012 governs consumers (qualifying misrepresentation: innocent, careless, deliberate/reckless). The Insurance Act 2015 governs non-consumer contracts via the duty of fair presentation, including what the insured knows and what a reasonable search would reveal.
- Warranties: under IA 2015 s.10, breach suspends cover rather than discharging the contract; s.11 prevents reliance on terms irrelevant to the loss.
- Fraudulent claims: IA 2015 s.12 lets the insurer avoid the claim and recover sums already paid.
Worked example
A commercial property insured fails to disclose a serious fire at a sister premises. The insurer shows the fact was material and induced it to underwrite. Under IA 2015 the remedy is proportionate: if it would have charged 20% more, the claim is reduced by 20%; if it would have declined, it may avoid and refuse. For a consumer, CIDRA applies the same proportionate logic to careless misrepresentation.
Traps
- Applying IA 2015 to a consumer policy: CIDRA governs.
- Saying breach of warranty automatically ends the contract.
- Confusing subrogation (recovery from a third party) with contribution (sharing between insurers).
- Assuming life cover needs insurable interest at the time of loss.