AAii 303 Legal Principles of Insurance key terms

The mutual duty of proposer and insurer to deal honestly and disclose material facts, allowing each party to rely on the other's candour when forming the contract.

A legally recognised relationship to the subject matter of insurance, such as ownership or liability, that would be affected by its loss or damage.

The rule that an insured is restored to the financial position held immediately before the loss, no better and no worse, subject to policy limits and excesses.

A fact that a prudent insurer would want to know when deciding whether to accept a risk, and on what terms, including premium and conditions.

The proposer's failure to reveal a material fact that the insurer needed, which may allow the insurer to avoid the contract or seek other remedies.

An untrue or misleading statement of fact made to the insurer before or during the contract, whether careless, negligent or deliberate, which induced the insurer to act.

The duty to disclose every material circumstance the insured knows or ought to know, and to do so in a reasonably clear and accessible manner.

The dominant, effective and operative cause of a loss, the one that sets the other causes in motion and determines whether the policy responds.

Two or more independent perils operating together to produce a single loss, where one is insured and the other excluded, raising questions of which the law treats as dominant.

A specified event, circumstance or cause for which the policy expressly provides no cover, such as war, wear and tear, or deliberate acts.

A policy term that must be complied with exactly, whether or not it is material to the risk, and whose breach can discharge the insurer's liability.

A statement made by the proposer during negotiations that induced the insurer to enter the contract, but which does not form part of the policy terms.

A policy term that must be satisfied before the insurer's liability arises, for example giving prompt notice of a claim or submitting proof of loss.

A term that, if breached after the insurance has attached, entitles the insurer to terminate or reduce liability for the claim concerned.

The remedy of treating a contract as never having existed, retrospectively wiping out cover, typically available where there has been fraudulent or reckless non-disclosure.

Setting aside a contract and restoring the parties, so far as possible, to their pre-contract positions, including return of premium where the law allows.

The insurer's right, after paying a claim, to step into the insured's shoes and pursue recovery from the party responsible for the loss.

The right of one insurer to recover a proportionate share from another insurer that also covers the same loss, preventing double recovery by the insured.

The situation where more than one policy covers the same insured interest against the same risk, so that total cover exceeds the value at risk.

A policy clause limiting an insurer's liability to its share of the total cover when other insurance also applies to the same loss.

A provision reducing a claim in proportion to underinsurance, applying where the sum insured is less than the value of the property at risk.

Cover arranged for a sum insured below the true value of the subject matter, which can trigger average or a reduced settlement on a partial loss.

An improvement in the insured's position resulting from repairs or replacement, which indemnity principles may require to be deducted from a settlement.

The residual value of damaged property or the right of the insurer, after paying a total loss, to take over what remains of the subject matter.

The insured's notice surrendering the remains of damaged property to the insurer in return for a total loss settlement, effective only where the policy allows.

A loss where the subject matter is not destroyed but is so damaged that recovery or repair costs would exceed its insured value.

A loss where the insured subject matter is destroyed, or so damaged that it ceases to be the thing insured, entitling the insured to the full sum insured.

The risk that the existence of insurance changes an insured's behaviour, encouraging carelessness, exaggeration of claims or even deliberate loss.

A claim deliberately exaggerated, fabricated or supported by false evidence, which may entitle the insurer to refuse the whole claim and avoid the policy.

A policy term requiring the insured to notify claims promptly, provide information and assist the insurer's investigation, often expressed as a condition.

The statutory or contractual ability of someone who is not a party to the insurance contract to enforce its benefits, for example an injured claimant under liability cover.

The common law rule that only the parties to a contract may sue or be sued on it, now modified by statute for certain insurance and third party situations.

The basic formation mechanism of a contract, where one party proposes terms and the other agrees to them, creating a binding agreement once consideration is given.

The value each party brings to the contract: the insured's premium, or promise to pay it, and the insurer's promise to indemnify against specified losses.

A temporary document evidencing interim insurance before the formal policy is issued, often used where cover must begin immediately.

The Latin description of insurance as a contract of the utmost good faith, imposing heightened disclosure and honesty duties on both parties.

A false statement made honestly and without negligence, which may still give the insurer a remedy, though usually limited to damages or cancellation rather than avoidance.

The maximum amount the insurer will pay under the policy, stated in the schedule and forming the basis for premium calculation and average provisions.

The rule of interpretation that ambiguous wording in a policy is construed against the party who drafted it, usually the insurer.