Insurance Contract Principles and Legal Framework
Domain 2 tests the legal building blocks of an insurance policy and the special doctrines that decide whether a claim is payable. Questions often mix contract law with insurance-specific rules.
Core rules
- A valid contract needs offer, acceptance, consideration, capacity, free consent and lawful object. The proposal is usually the offer; the policy is the acceptance.
- Insurable interest must exist at inception for life insurance and at inception and loss for indemnity insurance. A person is presumed to have interest in their own life and, generally, a spouse’s life.
- Utmost good faith requires disclosure of material facts that would influence a prudent underwriter.
- Indemnity restores the insured to the pre-loss financial position; it applies to fire, marine and motor own-damage, but not to life or fixed-benefit personal accident cover.
- Subrogation lets the insurer step into the insured’s recovery rights after paying an indemnity claim. Contribution shares a loss among insurers covering the same interest.
- Proximate cause is the dominant, effective cause of loss.
Worked example
A life proposal suppresses treated hypertension. The insurer issues the policy; death occurs from a heart attack in year two. Under Section 45 of the Insurance Act, 1938, the insurer may repudiate within three years if the misstatement was material and knowingly false or suppressed. After three years, the policy cannot be called in question on that ground unless fraud is proved. Reasoning: the remedy depends on materiality, knowledge and the three-year limit.
Traps that cost marks
- Applying indemnity to a life policy.
- Placing insurable interest only at the loss date for property.
- Confusing subrogation with contribution.
- Ignoring the Section 45 time limit.