The Insurance Contract: Principles of Insurance Law
This domain tests the principles that distinguish insurance from ordinary contract: insurable interest, indemnity, subrogation, contribution, proximate cause, and the disclosure and warranty rules governing the risk. Expect calculation questions on proportionate remedies and average, and definitional questions on each principle.
Insurable interest
Life policies require interest at inception (Life Assurance Act 1774) or the policy is void. Marine policies require interest at the time of loss (Marine Insurance Act 1906 s.4). Indemnity policies generally require interest when the contract is formed, and certainly at the time of loss.
Indemnity
The insured is restored to the pre-loss financial position, subject to sums insured, limits and excesses. Alternatives include reinstatement, new-for-old and agreed-value cover. Underinsurance may be addressed by average: a sum insured of £80,000 on a £100,000 value with a £20,000 loss produces £16,000.
Subrogation and contribution
Subrogation begins once the insurer has paid: the insurer may sue third parties in the insured's name but cannot recover more than it paid, and the insured must not prejudice those rights. Contribution applies between insurers covering the same interest, subject matter and peril; it is usually rateable, and double insurance clauses often impose pro rata liability.
Proximate cause
Look for the dominant, effective cause. Where an excluded peril and an included peril operate concurrently, the excluded peril generally prevails, so cover fails.
Disclosure and warranties
- Consumers (CIDRA 2012): a duty to take reasonable care not to make a misrepresentation, judged subjectively and by the questions asked. Remedies are proportionate: a reduction reflecting what would have been charged, or avoidance only for deliberate or reckless conduct.
- Commercial insureds (Insurance Act 2015): the duty of fair presentation requires disclosure of every material circumstance, including that which a reasonable search would reveal, in a clear and accessible form. Remedies are proportionate, avoidance, or avoidance plus retention of premium for deliberate or reckless breach.
- A warranty is now a suspensive condition (s.10): breach suspends cover for the period of breach and does not automatically end the contract. "Basis of contract" clauses are abolished.
- Fraudulent claims (s.12) allow the insurer to avoid the policy, retain premium and refuse the fraudulent claim.
Worked example
A consumer pays £1,000 premium without disclosing a conviction that would have produced a £1,500 premium. A £3,000 claim arises. The insurer cannot avoid; it applies the proportionate remedy: £3,000 × (£1,000 ÷ £1,500) = £2,000.
Traps that cost marks
- Applying the Insurance Act 2015 to consumers, or CIDRA to commercial risks.
- Treating breach of warranty as automatic termination of the contract.
- Assuming subrogation exists before payment.
- Confusing contribution with subrogation.
- Forgetting that contracting out of the 2015 Act requires the statutory transparency conditions.