Insurance Contract Law and Policy Provisions: Good Faith, Warranties and Construction
This domain tests contract formation, the duty of utmost good faith, and how policy terms are read when insurer and insured disagree.
Formation and good faith
Offer (application), acceptance, consideration (premium) and lawful object create the contract; cover notes give interim protection until the policy issues, and endorsements amend it. Sec. 63 requires each party to communicate in good faith all facts material to the risk within its knowledge. Concealment - even innocent, if material - and material misrepresentation entitle the insurer to rescind. A warranty is a literal condition: breach defeats recovery even if immaterial, though life policies soften this. Conditions precedent such as notice of loss and proof of loss must be met; exclusions remove specified perils.
Construction
Ambiguity is read against the insurer that drafted the policy. Waiver and estoppel apply where the insurer's conduct - accepting late proofs, paying without reservation, defending an action - gives up a defence it otherwise had.
Worked example
An applicant for a P5M life policy denies a heart procedure on the medical form. The policy issues and the insured dies of an unrelated accident 14 months later. The insurer may rescind within the two-year contestability period because the concealment was material to underwriting, returning premiums; the beneficiary recovers nothing. Separate riders, such as accidental death benefits, must be analysed on their own terms.
Traps
- Equating concealment with misrepresentation - the remedies and elements differ.
- Treating an immaterial false statement as automatically fatal.
- Missing waiver: accepting a late premium without conditions can restore cover.
- Forgetting that the insurer must return premiums on rescission.