Lecture Fundamentals of business law (7/e): Chapter 11 - M.L Barron

Chapter 11 - Insurance law. At the end of this chapter you should understand: how a contract of insurance is made, the term ‘cover note’, the concept of insurable interest at common law and how it has been modified by the Insurance Contracts Act 1984 (Cwlth),...

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Insurance law

Chapter 11

Learning objectives

At the end of this chapter you should

understand:

• how a contract of insurance is made

• the term ‘cover note’

• the concept of insurable interest at common law and

how it has been modified by the Insurance Contracts

Act 1984 (Cwlth)

• the concept of indemnity and its operation in contracts

of insurance

• the doctrine of disclosure and the matters that the

insured is obliged to disclose in a proposal form

• the operation of the doctrines of subrogation and

proximate cause

Learning objectives (cont.)

• the operation of the doctrine of privity of contract to

contracts of insurance

• the various classes of insurance contracts

• how insurance contracts are renewed and cancelled

• the role of insurance agents and brokers

• the appropriate insurance cover for business

operators.

• Insurance law is concerned with the relationship

between two persons One person (the insurer)

agrees to compensate or indemnify the other (the

insured) for any loss sustained on the happening

of a particular event

• Insurance is regulated by common law and

legislation.

• Relevant federal legislation includes:

– Insurance Contracts Act 1984

– Life Insurance Act 1995

– General Insurance Reform Act 2001

The contract of insurance

Premium (consideration)

Insurer Insured/assured (proponent)

Promise of payment by the insurer

• The proposal is the offer.

• The policy is evidence of the contract.

Cover notes

• A form of interim insurance

• Contract requiring payment

whether proposal accepted or

rejected

• Contract for interim insurance for

up to 1 month

Prudential regulation of the

insurance industry

• Insurance is also defined as a financial

product under the Corporations Act 2001 and

the insurance market is regulated by ASIC.

• The Australian Prudential Regulation

Authority (APRA) took over the role of the

Superannuation Commissioner in July 1998

• Prudential regulator of banks, insurance

companies and superannuation funds

– Issues guidelines

– Prevents certain promotional material

Codes of practice

• Set out minimum standards with

which insurers must comply

• Produced by insurance companies

in conjunction with APRA

• Voluntary, but the industry is

committed to compliance

• Most recently reviewed General

Insurance Code of Practice came

into operation on 1 May 2010

Resolution of disputes

• Every insurance company should have an

internal dispute resolution service.

• If a dispute cannot be resolved or an insured is

unhappy with the decision an insured may

refer the matter to the Financial Ombudsman

Service.

• FOS is an independent body providing a single

national complaint handling service for

banking, insurance and investment disputes.

• A referral notice must be lodged within three

months of the final decision of the insurance

company.

Fundamental principles of

insurance law

• Insurable interest:

The insurer will benefit from the property

being preserved, and will suffer detriment if

the property is damaged or destroyed.

• Indemnity principle:

The insurer agrees to indemnify the insured

for loss on the happening of a particular

event

(Fixed payouts are not included.)

Fundamental principles of

insurance law (cont.)

• Duty of utmost good faith:

Both parties must act in good faith and disclose all

• What must be disclosed by an insured:

– Matters that the insured knows to be relevant to the

insurer’s decision to insure.

– Matters that a reasonable person could be expected

to have known to be relevant to the insurer’s

decision to accept the risk.

• Matters the insured is not required to disclose

– Matters that diminish the risk.

– Matters that are of common knowledge.

– Matters the insurer knows or, in the ordinary course

of the business, ought to know.

– Where the insurer has waived the insured’s

disclosure duty.

Effect of non-disclosure

• Innocent—insurer cannot avoid the

contract but can have the payout

reduced to return them to the position

they would have been in had they

known the information prior to forming

the contract.

• Fraudulent—as above, but the insurer

has the additional option of avoiding the

contract.

– On payment of a loss, the insured person passes

his/her rights and duties, in respect of the insured’s property against third parties, over to the insurer.

on a pro rata basis.)

• Doctrine of proximate cause

The insured is covered against loss only if

insured against the 'proximate cause of a

loss', i.e the first incident causing the loss.

Fundamental principles of

insurance law (cont.)

• Doctrine of privity of contract

Only the parties to a contract can receive

rights and obligations pursuant to the

contract, i.e only the parties to a contract

can sue or be sued with respect to the

Standard cover

Insurer pays a minimum amount,

as specified in the regulations.

Renewal and cancellation of

insurance contracts

• Renewal:

– Insurer must notify the insured in writing within

14 days before the cover expires.

• Cancellation:

– The insurer can cancel a contract of general

insurance for a number of breaches, such as:

– Comprehensive motor vehicle

– Third party property motor vehicle

– Marine

– Theft

Average clause

Advised in writing

Amount paid =

Value of property stated in the policy x amount of loss

Actual value of the policy

Insurance Contracts Act

Value of property stated in the policy x amount of loss

80% of the actual value of the property

Insurance Contracts Amendment Bill 2010

– Will not cover worker’s compensation

– Notices can be in an electronic format

– ASIC to be given powers of intervention in

matters under the Act

Insurance Contracts Amendment Bill 2010 (cont.)

• Clarifies issues of disclosure and misrepresentation

• Insurers must give information that is ‘clear, concise and effective’

• Notion of ‘utmost good faith’ extended to cover

provisions that the Act implies or imposes into a

– Professional indemnity insurance

– Public liability insurance

– Product liability insurance

– Compulsory third party motor vehicle schemes

Insurance provider’s liability

• Insurance agent

Acts on behalf of a particular insurer

– Liability:

Insurer will be liable even if agent acts outside scope of

actual or apparent authority.

• Insurance broker

Runs independent business to arrange the best rate

from an insurer, on behalf of the broker’s client.

– Liability:

Owes a duty to the insured to exercise reasonable skill and care in completing proposal forms.