The insurance contract
The insurance contract
This domain examines how an insurance contract is formed, what its terms mean, and what happens when a term is broken. The exam favours scenario questions on warranties, conditions, disclosure and the boundary between consumer and commercial rules.
Core rules
- Formation and duration. Offer and acceptance may be documented by a proposal, cover note or policy schedule. Temporary cover can end on a stated date or when the policy starts; cancellation and renewal terms matter.
- Terms. A warranty is a promissory term; under the Insurance Act 2015 breach suspends the insurer's liability during the breach, rather than automatically avoiding the policy from inception. Once the breach is remedied, cover resumes. A condition precedent to liability must be satisfied before a claim is payable; a condition precedent to contract affects formation.
- Consumer disclosure. Under CIDRA 2012 the consumer must take reasonable care to answer questions fully and accurately. The insurer's remedy depends on the consumer's state of mind: deliberate or reckless, careless, or innocent. The remedy must be proportionate.
- Commercial disclosure. Under the Insurance Act 2015 the insured must make a fair presentation of the risk: disclose material circumstances, avoid misrepresentation, and do so in a reasonably clear and accessible way. The insurer may have remedies ranging from proportionate reduction to avoidance depending on culpability.
- Construction. Words are read in context and according to their natural meaning. Ambiguity may be resolved against the party who drafted the term, but that is a residual tool, not a licence to rewrite clear wording.
- Claims conditions. Notification, cooperation and proof requirements are usually conditions; breach may entitle the insurer to decline a claim, but the term must actually be breached and the consequences assessed under the policy and statute.
Worked example
A commercial policy contains a warranty that a sprinkler system must be maintained in working order. The insured's sprinkler is switched off for repairs for five days; a fire occurs on day three. The breach suspends cover while the system is not working, so the insurer may decline that fire claim. If the fire had occurred after the system was restored and tested, the breach would have been cured; the insurer could not avoid the policy from inception for that historic breach. If the term were merely a condition precedent to liability requiring a maintenance certificate, the analysis would turn on whether the certificate condition was met.
Traps
Do not say breach of warranty automatically voids the policy. Do not apply commercial fair presentation rules to a consumer. Do not treat every policy term as a condition precedent. Do not ignore the insured's duty to cooperate after loss. Do not confuse a representation, a statement inducing the contract, with a warranty, a promise in the contract.