Insurance Law

Text and Materials

Ray Hodgin

• Publisher: Routledge-Cavendish
• Year: 2016
• eBook ISBN: 9781135337483
• Topic: Law
• Subtopic: Financial Law
• Index: Law

Insurance law is a complex and fast-moving area of law, making it difficult for the law student to grasp. This is the first book to bring together a wide range of insurance materials with an introductory text to each chapter. This second edition has been completely updated and includes recent House of Lords and other significant judgments, as well as supervisory changes by means of legislation and codes of conduct. Each chapter starts with a stand-alone text, which provides the student with a clear explanation of the topic under consideration and is then followed by illustrative materials. Whilst the book concentrates on the general principles of insurance law, it inevitably draws on examples (cases and legislation) taken from the main branches of motor, property, marine and liability insurance. Throughout the book there is an emphasis on law reform by means of comparison with other jurisdictions. The book is designed for students studying insurance law at undergraduate level. It would also be suitable for students studying for the Chartered Insurance Institute examinations.

CHAPTER 1
A GENERAL INTRODUCTION

INTRODUCTION

This chapter is something of a mixed bag of disparate subjects, important nonetheless, for setting the scene for what will follow in later chapters. Reference is made in this chapter to the historical foundations of insurance law; a definition of insurance is formulated and some of the statutory background, mainly procedural, affecting insurance, is described. Some facts and figures about insurance law are provided and European issues affecting insurance are also considered.

Historical background

According to Holdsworth (Appendix 1.1), the earliest remaining example of an insurance policy (polizza) is to be found in Genoa, dating from 1347. The Greeks, however, were no strangers to agreements which had the appearance of insurances (on marine adventures). An insurance court was set up in Bruges in 1310. The first English policy appears to date from 1547 (a marine policy). The development of English insurance law was largely due to the judgments of Lord Mansfield, in the second half of the 18th century, wherein he tackled many of the subjects which form the basis of later chapters of this book. (See Oldham, Appendix 1.2.) By 1688, Edward Lloyd’s coffee house had become a venue for the transaction of insurance business and, in 1696, he published a newssheet entitled Lloyd’s News, in which movements of ships were entered. (See Clayton, British Insurance, 1971, London: Elek.) The article and book referred to above provide a wealth of historical detail.

What is insurance?

A definition of the subject matter of a book on a specialist area of law seems a sensible requirement. Most law books, however, irrespective of the branch of law with which they are concerned, are usually forced to admit that there is no single accepted definition of their subject area. Insurance law is no different, despite the fact that there are numerous statutes regulating this area. Writing in 1753, Nicolas Magens, in ‘An essay on insurance’, described the situation thus:

The contracting parties are: the insured, who pays a consideration, which is called a premium; and the insurer, who receives it. For the premium the insurer engages to satisfy, and make good to the insured, unless a fraud appears, any loss, damage, or accident that may happen; according to the terms of the contract or policy.

In Prudential Insurance Co v IRC [1904] 2 KB 658, Channell J stated that there were three requirements for a valid contract of insurance. First, it should provide some benefit for the policy holder on the occurrence of some event; secondly the occurrence should involve some element of uncertainty; and thirdly the uncertain event should be one which is prima facie adverse to the interest of the assured. The judge then added that this was not an exhaustive definition!

Why is it important to struggle to find a definition? (See Appendices 1.3, 1.4, and 1.5.) One of the main reasons is that there are a number of statutes that dictate certain consequences for the parties affected by the contract of insurance. For instance, as will be seen below, an insurer needs to be authorised to carry on insurance business in the European Union and where an insurance company is wound up certain consequences follow to aid the policy holder. Certain classes of insurance are subject to particular statutory requirements such as the Life Assurance Act 1774 (Appendix 2.2) and the Marine Insurance Act 1906 (Appendix 4.3). In 1994, the Finance Act introduced an insurance premium tax in relation to an insurance contract.

The controlling legislation for authorisation is the Insurance Companies Act 1982. From 1871 until 1998, the Department of Trade and Industry was the Government department charged with responsibility for overseeing the regulatory powers. However, in 1998, these responsibilities were switched to the Treasury.

The key players in the insurance market are the insurance/reinsurance companies; Lloyd’s of London and insurance intermediaries.

What is the legal standing of an insurance contract issued by a company that is not authorised? In the 1980s, there were conflicting court decisions as to the answer. The Financial Services Act 1986 presented the opportunity, in s 132, to resolve the problem. The solution has been retained in the Financial Services and Markets Act 2000, see below. The answer is that a contract issued in contravention of the Insurance Companies Act 1982 (s 2) shall be unenforceable against the other party, but that that party shall be entitled to recover any money or other property paid or transferred by him under that contract, together with any loss sustained by that party. However, the Act gives the court the discretion to enforce the contract on behalf of the unauthorised insurer – if the company can show that it reasonably believed that it was not in contravention of the authorisation requirements and if it is just and equitable for the contract to be enforced.

Insurance companies

There are approximately 800 companies authorised to conduct insurance business in the United Kingdom, and 4,000 in the European Union. They range from the mega companies, which are household names, to small companies that are in very specialised areas of insurance. A company may seek authorisation for any of the following individual classes of business (Insurance Companies Act 1982; Insurance Companies Regulations 1994; and Insurance Companies (Third Insurance Directives) Regulations 1994).

Long term business and reinsurance

Long term business and reinsurance covers:

1. life and annuity;
2. marriage and birth;
3. linked long term;
4. permanent health;
5. tontines;
6. capital redemption;
7. pension fund management;
8. collective insurance;
9. social insurance.

General business and reinsurance

General business and reinsurance includes cover for:

1. accident;
2. sickness;
3. land vehicles;
4. railway rolling stock;
5. aircraft;
6. ships;
7. goods in transit;
8. fire and natural forces;
9. damage to property;
10. motor vehicle liability;
11. aircraft liability;
12. liability for ships;
13. general liability;
14. credit;
15. suretyship;
16. miscellaneous financial loss;
17. legal expense;
18. assistance.

Financial Services and Markets Act 2000

The Financial Services Act 1986 was a massive and ambitious piece of legislation aimed at supervising all forms of financial services, of which insurance, but not all types of insurance, is one. Its replacement, the Financial Services and Markets Act 2000 (FSMA), is even more comprehensive in its coverage. Despite its intimidating length, 433 sections and 22 Schedules, it is only the tip of the iceberg. In its wake will come handbooks covering all aspects of the Act, in similar fashion to the 1986 Act. Only parts of the FSMA concern insurance. The key body in the superstructure of the FSMA is the Financial Services Authority (FSA):

• The Insurance Brokers (Registration) Act 1977 is repealed by the FSMA but no statutory replacement was envisaged. However problems with the newly created self-regulatory system (GISC) that was intended to replace the 1977 Act has caused the FSA to say that by 2004 the work of the GISC will be absorbed into the FSA (See Chapter 6, below for more detail).
• The Insurance Ombudsman Scheme, created in 1981, together with other voluntary schemes in other areas of financial undertakings, have been brought together in one Financial Ombudsman Service (FOS) (see Chapter 11 for more detail).
• The Policyholders Protection Act 1997 whereby the victims of insolvent insurance companies could seek compensation from a central fund is also recast under the FSMA (see below).
• Lloyd’s was always self-governing but has now been brought within the jurisdiction of the FSA. However the Council of Lloyd’s will maintain supervisory control as in the past but with the FSA having the ability to intervene if deemed necessary.

Lloyd’s of London

(Some of the figures below are changing rapidly, reflecting the recent traumas at Lloyd’s.)

A few facts to set the background to Lloyd’s:

• a little over 300 years old (founded in 1688);
• a market place of underwriters not an insurance company;
• financed for over 300 years only by individuals, called Names. But with the Lloyd’s litigation problems of the 1990s (where Names sued managing agents for negligence) the number of Names has dropped from over 32,000 to less than 2,500 within 10 years;
• in place of Names, since 1994, the concept of limited liability companies providing the financial basis has been allowed. That base (2002) exceeds £12 billion in capacity.

In 2001 the corporate capacity was over £9 billion and there were 894 corporate members.

In 2001 individual Names capacity was almost £2 billion and there were 2852 individual Names:

• Names and corporate members join syndicates which tend to specialise in certain areas of insurance. The number of syndicates has also decreased in recent years and in 2001 there were 108. The active underwriter of each syndicate has the responsibility for making the day to day insurance decisions;
• the Corporation of Lloyd’s is the administrative base of Lloyd’s, supplying the support infrastructure, for example: Lloyd’s Policy Signing Office, claims service, membership vetting, liaison with Lloyd’s brokers, public relations, complaints procedures (although, as a last resort, Lloyd’s is a member of the Ombudsman service);
• Lloyd’s is only to be found in Lime Street in London, there are no branch offices, but Lloyd’s has representatives in other countries to look after their and their clients’ interests.

Insurance intermediaries

The importance of the intermediary to the British insurance market can not be over-estimated. Highly skilled intermediaries not only provide a valuable professional service to insureds in this country but they play an invaluable part in advising overseas clients and thus play a major part in making insurance the important invisible export earner that it is today.

Intermediary covers a range of people. Classification is important in order to determine the legal responsibilities of intermediaries and to whose self-governing rules they are subject. In simple terms we can talk of employees or agents of a particular insurer on the one hand and the truly independent broker or insurance consultant on the other. The subject is dealt with in Chapter 6.

THE SINGLE EUROPEAN MARKET IN INSURANCE

Supervision of insurance companies dates back to 1870. United Kingdom membership of the European Union in 1973 and the declared aim of producing a single market in insurance within the European Community, required the United Kingdom Government to introduce numerous changes (for greater detail, see Merkin and Rodgers, EC Insurance Law, 1997, London: Longman).

When faced with the difficult task of dismantling barriers to a single market in insurance, it was inevitable that the easiest barriers were dealt with first and then slowly (and in the case of insurance, very slowly) the more difficult obstacles were tackled.

The declared aim of the Treaty of Rome is to ‘ensure the economic and social progress’ of their countries by common action to eliminate the barriers which divide Europe. Of course to eliminate barriers, which must mean protective barriers, will have the inevitable effect of exposing the weak markets to the strong markets. In insurance, it is assumed, at least by the United Kingdom, that a long and influential history in insurance, the major invisible export earner, must put the United Kingdom in the ‘strong’ camp. It may well be that the international flavour of the United Kingdom industry, together with mega firms of insurance brokers, and Lloyd’s in particular, is seen by outsiders as a major strength.

Many of the articles of the Treaty inevitably concern insurance, which, of course, is only one segment of financial services. Of particular importance are Arts 52–58, which are concerned with the right to establishment, and Arts 59–66, which are concerned with freedom to provide services.

Freedom of establishment is the right to set up in business and to carry on that business in any Member State; freedom to provide services means the facility to provide a service in one country without having any business location in that country. Various court decisions have dealt with the meaning of these articles, but none of the cases, prior to 1986, had been specifically concerned with insurance (see Reyners v The Belgium State [1974] CMLR 305; Patrick v Minister for Cultural Affairs [1977] 2 CMLR 523; Van Binsbergen v Board of Trade Association of the Engineering Industry [1975] 1 CMLR 298).

In 1986, important decisions were handed down by the European Court of Justice (see [1986] ECR 3755; Edwards (1987) EL Rev 231; Hodgin (1987) CML Rev 273) specifically concerning insurance and the above mentioned articles of the Treaty of Rome. The case was brought by the Commission and two Member States with liberal insurance rules (the United Kingdom and the Netherlands), under Art 169, against Member States who had conservative and self-protective insurance regimes (that is, the Federal Republic of Germany, France, Italy, Ireland, Belgium, Denmark). Article 169 allows the Commission to deliver a reasoned opinion for the consideration of any Member State whom it feels has failed to fulfil an obligation under the Treaty. If there is no compliance by the Member State, the Commission can take the matter to the European Court of Justice.

The outcome of the case was, unfortunately, somewhat ambiguous, although there was a distinct moral victory for the liberal approach. The court held that a Member State could not insist that in order to carry on insurance business in one Member State an insurer from another Member State must set up an establishment in that Member State. Thus, there was a victory for providing services on a transnational basis. But, the effect of this pronouncement was somewhat tempered by the court’s acceptance of the defendants’ argument that, as insurance was a sensitive area, in the sense that the protection of the policyholder was paramount, certain limited and more protective supervisory laws of a particular Member State should be followed by any insurer wishing to do business in that Member State. In particular, what the court had in mind as being in need of special protection, was the solvency of insurance companies and the contractual conditions of the policy. The real difficulty with the court’s decision was in identifying when a Member State was entitled to demand strict observance of its own national rules. What is clear, however, is that a Member State must not require observance of conditions which exceed what is necessary for the protection of policy holders and insured persons. It is also obvious that with so many different types of insurance in the market, the concept of consumer protection, while applicable to some (that is, mass risks) would be inapplicable to others (for example, large risks). These two types of risks are explained below. There is little doubt that the judgment had a very important effect on the wording of later Directives.

A brief summary of some but not all of the insurance Directives and how UK law implemented them

Reinsurance Directive 1964 (64/225/EEC)

The declared aim of this Directive was to abolish restrictions on freedom of establishment and freedom to provide services in the very specialist area of reinsurance. It was obviously passed before the United Kingdom’s accession, and it caused no real problems to United Kingdom practices when the United Kingdom finally joined in 1973. This was because United Kingdom domestic law had no barriers to competition in this area of insurance law, operating, as it does, an open door policy.

Motor Insurance Directives (72/166/EEC; 72/430/EEC; 84/5/EC; 90/232/EC; 90/618/EC; 2000/26/EC)

The 1972 Directive, as amended, obliged Member States to introduce compulsory motor insurance for vehicles normally based in its territory. It also required the Member States to see that the insurance covered any loss or injury caused in other Member States in accordance with the laws in force in those other Member States. The Directive eliminated green card checks at frontiers.

The 1983 Directive extended compulsory third party motor insurance to cover damage to property, to a minimum guaranteed level. This was a new requirement for United Kingdom insurers. The Directive also further enhanced the protection of the victims of uninsured drivers.

The 1990 Directive filled gaps left by the above two Directives. It extended cover to all passengers (other than those who enter a vehicle knowing it to be stolen). It also required insurers to provide compulsory third party cover throughout the European Union at the level required by the Member State where the accident occurs or of the Member State where the vehicle is normally based, if that cover is higher. This means that the victim of a United Kingdom policyholder injured outside the United Kingdom will benefit from the unlimited liability of United Kingdom motor policies.

The above requirements are to be found in the Road Traffic Act (RTA) 1988 and the Motor Vehicles (Compulsory Insurance) Regulations 1992 (SI 1992/3036).

The importance to the citizen of Directives can also be seen in Motor Vehicles (Compulsory Insurance) Regulations 2000 (SI 2000/726). The House of Lords had interpreted the compulsory insurance provisions of the RTA 1988 as being inapplicable to accidents occuring in a car park (Cutter v Eagle Star Insurance [1998] 4 All ER 417). The cumulative effect of the above Directives is to see that all civil liability arising out of the use of a ...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• PREFACE TO THE SECOND EDITION
• PREFACE TO THE FIRST EDITION
• ACKNOWLEDGMENTS
• TABLE OF CASES
• TABLE OF STATUTES
• TABLE OF STATUTORY INSTRUMENTS
• TABLE OF EUROPEAN LEGISLATION
• COMMONWEALTH AND OTHER LEGISLATION
• CHAPTER 1: A GENERAL INTRODUCTION
• CHAPTER 2: INSURABLE INTEREST
• CHAPTER 3: MAKING AND BREAKING THE INSURANCE CONTRACT
• CHAPTER 4: MISREPRESENTATION AND NON-DISCLOSURE
• CHAPTER 5: WARRANTIES AND CONDITIONS
• CHAPTER 6: INSURANCE INTERMEDIARIES
• CHAPTER 7: CONSTRUCTION OF THE POLICY
• CHAPTER 8: CLAIMS
• CHAPTER 9: SUBROGATION AND CONTRIBUTION
• CHAPTER 10: THIRD PARTIES (RIGHTS AGAINST INSURERS) ACT 1930
• CHAPTER 11: THE FINANCIAL OMBUDSMAN SERVICE: THE INSURANCE OMBUDSMAN