BUSINESS LAW

INSURANCE LAW

On completion of this chapter, you should be able to:

explain the main features of insurable interest

explain the main features of indemnity

explain the main features of utmost good faith

explain the main features of subrogation

InsuranceThe insured is indemnified against unforeseeable loss or damage which may or may not occur.

Assurance

The assured or their representatives will receive a sum of money on the occurrence of an event which must occur at some time, although the time of occurrence is uncertain, such as death.

Insurance is a means for persons and business to protect and compensate themselves against the risk of loss.

Risk is either:Speculative (uncertain); or

Pure (there will be loss if the risk should occur). Insurance is concerned with spreading the risk.

On completion of this chapter, you should be able to:

describe the duties and liabilities of insurance agents and brokers list and describe the common forms of insurance applicable to a business organisation explain the difference between general insurance and life assurance policies

“Return to a pre-loss position”.

Indemnity forms the basis of all general insurance

contracts and aims to put the insured back in their pre-

loss position by the payment of money, repair or

replacement of the lost or damaged property.

Insurable interest is stated in ss 16 and 17 of the ICA in

economic terms as pecuniary or financial loss.

Insurable interest exists if a person has suffered loss or

damage and is able to make a claim.

The basic principles of insurance can be found in the

common law but a considerable body of

Commonwealth, state and territory legislation has

been enacted which has either replaced or modified

the common law principles.

Double indemnity

While it is possible to take out two or more policies

(double indemnity), the insured cannot make a profit

out of the loss by claiming the full amount on both

policies.

Over-insurance

Even where insurance is for more than the

replacement value, the insured is only entitled to

recover to the extent of their loss unless the contract

is non- indemnity:

For example, life assurance.

The value of the insured property is taken at the

date of the loss when determining the amount recoverable unless it is:

a valued property; or replacement value property.

General insuranceThe insured must disclose all material facts which can be reasonably discovered and go to the question of risk whether they have been asked about them or not.

The onus of proof lies on the insurer and the standard of proof is the balan sc2e1(o1)f probabilities:

Lindsay v CIC Insurance Ltd (1989)

How long does the duty of disclosure last?

The duty to disclose all material facts lasts right up

until when the contract is formed (ss 21, 25).

The duty of disclosure is found in s 21 of the Insurance Contracts Act.

All contracts of insurance are contracts of the utmost good faith (uberrimae fidei), as the proponent has greater knowledge of the risk to be insured against than the insurer.

Under the Insurance Contracts Act both parties are

required to act in good faith towards each other (s 13).

Misrepresentation

The policy can be invalidated by either mistake or

misrepresentation.

The time to consider the truth of answers is at the time

of making the contract, looking at the surrounding

circumstances and with reference to the facts of the

case.

Misstatement of age for life assurance

Where the non-disclosure is related to the insured’s

age, the policy cannot be avoided.

Instead, the sum insured is reduced or increased (or the

premiums reduced) on a proportionate basis.

Matters that are not material)

Matters that are not material and do not need to be disclosed include:

matters that reduce the risk;

that are common knowledge to the insurer;

that the insurer should have known; and

where there has been a waiver of disclosure by the insurer.

The cover note

“Short-term cover”

Only provides interim coverage for a short period although it

is a contract in its own right.

The principle of subrogation is founded on equitable

principles and puts the insurer into the ‘shoes’ of the

insured, but only after payment of the loss.

It only applies to contracts of indemnity such as fire

and motor vehicle insurance.

Who makes the claim?The insured normally makes the claim

Must make the claim promptly to avoid prejudicing the

insurer’s rights against a third party:

s 54 — FAI General Insurance Co Limited v Australian

Hospital Care Pty Ltd (2001)

Renewal of the policy

Disclosure also applies to renewal, as renewal usually creates a new contract.Return of premium

The insured is entitled to a return of their premium if there has been a total failure of consideration.

Issue of a policy

Policy is the dominant document as the proposal is

incorporated into it.

Consideration for the contract is in the form of a premium

in return for the coverage.

If the risk has changed at the time of payment, the effect

may be that the contract will lapse.

CancellationA policy may be cancelled where the insured:failed to comply with the duty of utmost good faith;failed to comply with duty of disclosure;made a misrepresentation;made a fraudulent claim;breached a term of the contract.

Measurement of loss

Generally, in the case of an indemnity contract the insured

will only be able to the actual amount of the loss unless it is

an agreed value policy.

Measurement of loss If the contract contains a ’subject to average’ clause, the insured bears a pro rata proportion of any loss:Sum insured (SI)

Full value of subject x Amount of loss = Amount payable

Note: For homeowners, an averaging clause will be ineffective where the sum insured is 80% or more of the value of the insured property.

matter (FV)

(AL) (AP)----------------------------

The duties of an agent or broker are:Keeping proper accounts;Maintaining confidentiality of information; and

Accepting only the agreed or customary remuneration and nothing else.

The duties of an agent or broker are determined by express and implied terms that make up the agency agreement and include:

Following the principal’s instructions;Acting in person;Acting in good faith;Exercising reasonable care, skill and diligence;

Most contracts or insurance are arranged through intermediaries who can be employees of insurance companies, agents or brokers.

Insurance contracts includeFire insurance

Other kinds of general (indemnity) insuranceLife assurancePersonal accident insuranceHospital benefits and social service schemes

Liability of insurer for agents and employeesThe Corporations Act 2001 (Cth) now makes the insurer

responsible for the actions of their agents and employees

Even where the agent/employee is acting outside the

scope of their authority/employment.

Thank You

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