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What general rules, requirements and procedures govern the conclusion of (re)insurance contracts in your jurisdiction?
The usual rules of English contract law apply to insurance contracts, meaning that for a valid contract to come into effect, there needs to be:
- an offer;
- acceptance of that offer;
- valuable consideration; and
- certainty as to the terms.
In addition, there is a requirement for an insurable interest.
Usually, the party seeking insurance completes a proposal form and provide this to the insurer, often through an intermediary (an insurance broker). The insurer decides whether it is willing to offer the insurance sought and on what terms. An offer is accepted by the insured showing agreement to those terms by paying the premium or some other act. In the insurance context, the consideration given by the insurer is the promise to pay the claim in the event of a loss and the consideration given by the insured is the promise to pay a premium. Finally, for a valid insurance contract to arise, there must be certainty as to its material terms (eg, the definition of the risk and the duration of the policy term).
There is no all-embracing definition of ‘insurable interest’. In practice, the requirement is generally taken to mean that the insured must have a legal or equitable relationship to the adventure or property at risk and would benefit from its safety or may be prejudiced by its loss.
Under English law there is no general requirement as to the form which an insurance contract must take, although they are usually evidenced by a written policy and Section 22 of the Marine Insurance Act 1906 and Section 2 of the Life Assurance Act 1774 require the policy to be in written form.
Are (re)insurance contracts subject to any mandatory/prohibited provisions?
English law upholds the doctrine of freedom of contract, which means that commercial parties may, as a general rule, contract on whatever terms they agree. There are some exceptions to this, for example, basis of the contract clauses – whereby all the answers in the proposal form are accorded the status of warranties – are prohibited. More protection is afforded to consumer insureds.
Can any terms by implied into (re)insurance contracts (eg, a duty of good faith)?
(Re)insurance contracts are subject to the same general principles as other commercial contracts. As a general rule, terms may be implied into contracts:
- by statute – under the Marine Insurance Act certain warranties are implied into contracts of marine insurance and the Enterprise Act 2016 introduces an implied term into every (re)insurance contract agreed on or after May 4 2017 that the (re)insurer must pay claims within a ‘reasonable time’;
- by the courts, where the term would be necessary to give business efficacy to the contract;
- from previous dealings between the parties; and
- by industry custom.
What standard or common contractual terms are in use?
The following clauses are commonly found in insurance contracts:
- Insuring clause – this is the operative clause that specifies the perils insured against.
- Period clause – this sets out the term of the contract.
- Premium clause – this sets out the amount of the premium due and when it is to be paid.
- Exclusion clauses – these specify which perils are excluded from cover.
- Conditions – these clauses govern the mechanics of the insurance policy.
- Conditions precedent – these clauses must be complied with by the insured and must be satisfied either in order for the contract to come into being or for the claim to be paid.
- Warranties – these are promissory terms of the contract, whereby the insured promises the insurer that, for example, the insured has or has not acted in a stated way.
- Law and jurisdiction clauses – which specify the law applicable to the contract and the jurisdiction in which any dispute will be heard.
The following clauses are commonly found in facultative reinsurance contracts:
- ‘Follow the fortunes’ or ‘follow the settlements’ clauses – these either prevent or limit the reinsurer’s ability to dispute the validity of the underlying claim against the cedant.
- ‘Claims co-operation’ or ‘claims control’ clauses – these give the reinsurer varying degrees of control over the underlying claim against the cedant.
- Incorporation clauses – these may permit the incorporation of the terms of:
- the original, direct insurance policy; or
- the reinsurance policy immediately below the relevant contract.
The following clauses are commonly found in treaty reinsurance contracts:
- Inspection clauses: these allow the reinsurer to inspect the cedant’s records.
Reinsurance contracts also often contain aggregation clauses. These govern the way in which cedants may combine various claims for presentation as a single claim – for the purpose of the deductible and applicable limit.
What is the state of development in your jurisdiction with regard to the use of ‘smart’ contracts (ie, blockchain based) for (re)insurance purposes? Are any other types of financial technology commonly used in the conclusion of (re)insurance contracts?
There is currently no legal framework specifically designed for blockchain or smart contracts. However, market consortia are starting to be formed to explore the opportunities such contracts provide and the Financial Conduct Authority (FCA), in its discussion paper on distributed ledger technology of April 2017, stated that it was committed to fostering innovation in this area. The stated purpose of the discussion paper was to “start a dialogue on the potential for future development of DLT [distributed ledger technology]” in the markets regulated by the FCA.
What rules and procedures govern breach of contract (for both (re)insurer and insured)?
The (re)insurer’s remedy for the (re)insured’s breach of a contractual term varies according to the status of the term that is breached. For example:
- Condition – the breach entitles the (re)insurer to recover damages for any losses it suffers as a result of the breach.
- Condition precedent to the contract – the breach means that the contract never comes into being. There is no requirement for the (re)insurer to prove that it has suffered prejudice before it can rely on a breach of the term.
- Condition precedent to liability – historically a breach allowed the insurer to avoid liability for a claim regardless of whether it suffered a detriment as a result of the breach. The effect of condition precedent clauses to liability has been altered by Section 11 of the Insurance Act 2015, which applies to all contracts of (re)insurance agreed on or after August 12 2016. Under the act, if the condition precedent is – on its proper construction – one that would tend to reduce the risk of loss of a particular kind, at a particular location or at a particular time, the insurer cannot rely on the insured’s breach of the condition precedent to deny a claim if the insured can show that its breach could not have increased the risk of the loss that actually happened in the circumstances in which it occurred. Terms which define the risk as a whole are exceptions.
- Warranties – under the Marine Insurance Act, the breach of a warranty – however trivial and irrelevant to the risk or the loss – automatically discharges the insurer from all liability under the policy from the date of the breach and cannot be remedied. Under the Insurance Act, the discharge of the insurer’s liability has been made temporary, for the period of the breach, and liability is restored on remedy of the breach. Section 11 of the Insurance Act applies to warranties in the same way as to the conditions precedent.
- Pursuant to Section 13A of the Insurance Act, in relation to all contracts agreed on or after May 4 2017, policyholders have the opportunity to claim damages for breach of contract if a (re)insurer’s unreasonable delay causes additional loss.
For contracts subject to the Marine Insurance Act, if the insured breaches the duty of good faith, the insurer is entitled to avoid the contract ab initio. For contracts subject to the Insurance Act, the insurer’s remedy depends on what it would have done had a fair presentation been made. The remedies include avoidance, the insertion of terms into the contract from inception and the reduction of claim payment under the contract by the same proportion as the actual premium charged bears to the premium that would have been charged if there had been a fair presentation.
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