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Insurance contracts

Paperwork

Insurance companies often generate a large amount of paperwork. It is important that policyholders read and retain all correspondence and documentation provided to them by insurers. They should keep copies of any paperwork they complete.

Normally an insurer will require a consumer to complete a proposal form before considering the consumer for insurance. If a consumer has an existing policy with an insurer that is soon to expire, they may receive a renewal form for completion and return to the insurer.

If an insurer agrees to provide insurance they will normally issue an insurance or policy schedule. The schedule contains important information about the insurance contract, such as the details of the insured person or parties, the period of insurance, the type or class of risk insured, the premium, the excess, any additional risks covered by the insurance policy and special conditions applying to that consumer or that policy, and any specific risks excluded by the policy.

Insurers should also provide to the policyholder a copy of the policy wording. This is normally a standard form document or booklet containing the terms and conditions of the policy and more specific information about what is covered and not covered by the insurance contract. The policy wording will also outline how policyholders can make a claim under the contract and their rights and responsibilities in respect to claims.

Generally speaking, the insurance contract consists of the insurance schedule and policy wording; proposals and renewal forms may form part of the contract where they are referred to or incorporated in the contract by the schedule or policy wording.

If policyholders wish to either notify circumstances which may give rise to a claim, or lodge an actual claim, they will normally be required to complete a notification form or claim form.

Many insurers now arrange insurance cover over the phone and use the phone session to canvass proposal information with the consumer. They then type it up and mail it (with an invoice) to the consumer as a confirmation of insurance details form. Some insurers require the consumer to sign and return the confirmation form. Other insurers may simply state that by paying the premium the consumer is taken to have confirmed the information contained in the form.

This confirmation form may be used by insurers to allege that a policyholder has not disclosed important information to the insurer.

As discussed below, an insurer is required to notify a consumer of their duty of disclosure before an insurance contract is entered into.

It is important that consumers carefully read the confirmation and check the accuracy of its contents. In gathering information over the telephone, an insurer may not ask all the necessary questions. It is not unusual for insurers to guesscertain details about the consumer. For example, a confirmation may state that a consumer has no prior convictions when this is not, in fact, the case.

Section 2 of the Code requires insurers to conduct their sales process in a fair, honest and transparent manner. If an insurer cannot provide cover they are required to give reasons and to refer the consumer to another insurer or to the Insurance Ombudsman Service (see below).

Cover note

It is not unusual for consumers to require insurance at short notice. A common example is the purchase of a motor vehicle where the consumer wishes to take delivery of the motor vehicle before any insurance paperwork can be completed. In these circumstances insurers will issue a cover note. Cover notes are usually issued over the telephone and despite the absence of any paperwork or documentation they represent legally binding insurance policies. The IC Act refers to cover notes as “interim contracts of insurance”.

Prior to the IC Act, insurers issued cover notes subject to the satisfactory completion by the policyholder of an insurance proposal. The unsatisfactory completion of a proposal allowed insurers to avoid their obligations under the cover note.

Section 38 of the IC Act makes such provisions void. This section provides that if before the cover note has expired the policyholder has completed and submitted a proposal, then the insurer shall remain liable under the cover note until either the insurer or some other insurer issues insurance cover (or another cover note), or the cover note is cancelled, or a consumer withdraws their proposal, whichever occurs first.

It follows that consumers arranging a cover note should make written notes of the cover note details provided by the insurer. You may need to rely on these notes in the event that you wish to claim on the cover note before the cover note is confirmed in writing by the insurer.

Premium

The insurance premium is the price paid by the policyholder for the insurance policy. The premium may be payable in a lump sum or by instalments. Typically the insurance contract will state that an insurer is not liable to cover any loss until the premium is paid. Depending on the policy wording and the renewal notice, there is no principle of law that requires the payment of premium before an insurance contract will operate. However, failure to pay a premium may entitle an insurer to cancel the insurance policy.

Excess

The excess (or, as it is sometimes referred to, the “deductible”) is the contribution a policyholder is required to make towards the settlement or payment of any claim made under the insurance contract. Some insurers allow consumers to choose the level of their excess where a higher excess results in a reduced premium. Never choose an excess beyond your means, even if the result is a significantly reduced premium.

Some insurance contracts contain different excesses depending on the circumstances of the claim. For example, in motor vehicle insurance, a greater excess may be payable if the driver is below a certain age, or inexperienced. Consumers need to carefully read the insurance documentation to clarify whether an excess other than the basic excess is payable towards a claim.

In some policies no excess is payable. An example of this is where a policyholder has pre-paid to remove the excess. Some insurers will not require a policyholder to pay an excess if the driver of the insured vehicle is not at fault and the policyholder can provide details of the other driver.

Some insurers will not act on or pay a claim until the excess is paid. Policyholders need to read the policy documentation to confirm this requirement.

If insurers have recovered payments made under a policy from a third party (the person at fault), a policyholder may be entitled to a refund of any excess paid in respect to the claim.

Extent of cover

With the exception of life and accident policies, insurance policies are generally contracts of indemnity. In other words they cover policyholders for losses sustained by them upon the happening of an insured event. A policyholder cannot recover more than the value of a loss.

The nature of an indemnity or cover under an insurance policy will depend on the terms of the policy and may include one or more of the following:

  • payment of market value;
  • replacement;
  • new for old replacement;
  • repair;
  • reinstatement; or
  • payment of an agreed value.

All of the above are normally subject to the sum insured, which is the maximum sum payable by insurers under the policy.

The nature of the indemnity provided under an insurance contract depends on the terms of the contract and the nature of the claim. In most cases an insurance contract will provide that the insurer will cover the policyholder against loss or damage as a result of an insured event subject to the insurer’s right, as far as circumstances permit, to either repair, reinstate or replace the item the subject of the insurance claim.

If the policy permits the insurer to choose to pay the value of the property at the time of the loss, that value is calculated on the basis of the amount of money required to restore the policyholder to their position at the time of the loss.

Where repair is permitted under the policy, this may mean either actual repair or the payment of the cost of repair. Where there is a total loss, the market value of the item at the time and place of the loss is normally the appropriate measure of indemnity. If no market value exists, the cost of replacement is considered in assessing the appropriate value.

Sometimes the indemnity principle works to the disadvantage of a policyholder. In the case of a claim under a motor vehicle policy, an insurer is normally not required to repair the vehicle if the cost of repairs exceeds the value of the vehicle less any excess under the policy. In such circumstances, the policyholder will receive the “write off” value of the vehicle, which is calculated as the pre-accident value of the motor vehicle less any salvage value. Where the insured vehicle is relatively old this may mean very little return to the policyholder, and may not be enough to purchase a replacement vehicle.

If an insurer chooses to reinstate or repair damaged property these repairs must be carried out to the reasonable satisfaction of the policyholder and within a reasonable time. The insurer is responsible for the damaged property while it is being reinstated or repaired. Any subsequent damage to the property during this period is normally the responsibility of the insurer.

Prescribed contracts

Sections 34 and 35 of the IC Act deal with prescribed contracts. Prescribed contracts are outlined in the IC Regulations and comprise the following insurance policies:

  • motor vehicle insurance;
  • home buildings insurance;
  • home contents insurance;
  • sickness and accident insurance;
  • consumer credit insurance; and
  • travel insurance.

The IC Regulations set out the minimum requirements for such policies such as minimum sums insured and the required risks or insured events to be covered by the prescribed contract.

Under section 35(2) of the IC Act, an insurer can only avoid or limit its obligation to pay under a prescribed contract if, before the insurance contract is entered into, the insurer clearly informs the policyholder in writing of the relevant provisions on which the insurer relies to refuse or limit cover.

If the policy under consideration is a prescribed contract, it is important to check the IC Regulations to ensure that your policy conforms with the minimum requirements.

If an insurer seeks to reduce or decline cover under a prescribed contract, you should confirm that the term relied on by the insurer is permitted by the IC Regulations.

Insurance contracts :: Last updated: Sun Jun 30th 2013