Insurance Contract
H. Schedule
The six sections of the policy discussed so far are a standard document for each type of policy.
The policy forms are mass-produced and the schedule contains all the information concerning the individual risk that makes it an individual contract.
The schedule may include the following information:
• Name of the insured
• Postal address
• Risk address
• Description of business
• Inception Date
• Renewal date
• First and annual premium
• Policy number
• Sums Insured
• Description of property insured (if large a separate specification may be attached)
• Excess or deductibles
• Special conditions
• Name of broker or agent
What is the definition of a warranty?
Some people argue that warranties are part of the policy conditions and not a separate section of the policy. The argument is academic; the main point is that a breach of warranty entitles the aggrieved party (nearly always the insurer) to repudiate the entire contract. In that sense they are more ‘important’ than the conditions where although a breach might entitle insurers to repudiate the contract (e.g. fraud). Many breaches of conditions may entitle insurers only to repudiate an individual claim (breach of subrogation condition) or to impose stricter terms (e.g. failure to declare a premium adjustment condition).
Despite the seriousness of a breach of warranty, insurers in practice tend to be more moderate Learning objective
Illustrate the importance of warranties and their role in the insurance contract and the changes that occur to the policy during the policy period and how it works.
3.7 Warranties and endorsements
Warranties:
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The policy is the written evidence of the contract and contains all the details of cover provided.
Preparing the formal document takes time and it is not always possible, in fact, it is very rare for the document to be ready from the first day of the insurance.
In the meantime, the insured may need to show to a third party that insurance is in force. If a property is a collateral for a loan, the bank may insist on insurance or a contractor may need to prove insurance to his principal before commencing work. The cover note serves this purpose.
Cover notes simply state that insurance is in force and gives brief details of the cover. Notes are temporary and not needed once the policy is issued. The cover note may be a pre-printed form often in a numbered document, or it could take the form of a letter from the insured to the insurer.
Cover notes can be informal and vary between insurers as to content, style and appearance. They all, however, serve the same purpose. They are proof - if proof is needed - that insurance is in force and insurers are preparing the policy documents.
Certificates of insurance serve a very similar purpose as cover notes; they confirm that cover is in During the period of a policy, changes are inevitable. The insured may change his motor vehicle, or property owners may buy and sell properties, change declared values or add or remove items from the schedule. Insurers prepare an endorsement detailing the changes made to the terms of the insurance.
As stipulated for in the Unified Compulsory Motor Insurance Policy in KSA, the endorsement is “An agreement between an insurer and the insured, subsequent to the issuance of the Policy, whereby items of coverage are added to, amended or removed from the basic coverage, and which should be attached to the Policy and deemed an integral part thereof”.
One of the typical images of using endorsements is the case where the insured changes his insured vehicle according to the motor insurance policy, in which case the insured informs the insurance company. In turn, the insurance company, if it accepts to make the change, will inform the insured of any additional conditions or provisions that it may wish to impose (the value or performance of the new vehicle may be much higher than the old one). If the insured agrees to the new conditions, the endorsement will then amend the policy by stating the details of the new vehicle and any additional conditions (higher deductible) or additional premiums that must be paid.
Learning objective
Trainee will be able to know the role of the cover notes and certificates of insurance and when it can be used and its benefit.
3.8 Cover Notes and Certificates of Insurance:
Cover Notes:
Certificates of Insurance:
Endorsements
in their approach and unless it is very serious do not repudiate contracts for a single breach. They would not wish to lose an otherwise good policyholder and it is unlikely that they would repudiate a claim if the breach is not connected with the loss.
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It would be cumbersome to carry the entire policy document and as they differ from company to company, it would be difficult for the authorities e.g. the police to be sure that the policy was valid.
Certificates are therefore required and they are in a standard format recognizable by all concerned.
Marine cargo insurance uses certificates of insurance, and they become part of the shipping documents.
The certificate of insurance contains information concerning the shipment which will be substantially the same as that contained in a policy i.e. description of goods, conveyance, voyage, sum insured etc.
Marine Insurance plays a vital role in the international system of trade, although not legally required, the insurance policy together with letters of credit, bills of exchange, bills of lading, are necessary documents to facilitate the smooth exchange of goods and money around the world.
A vendor selling his goods overseas will naturally want payment for those goods when they leave his warehouse. A purchaser buying those goods will not wish to pay for them until they have safely arrived in his warehouse, possibly thousands of miles away. Journey times may take several months and there is clearly a problem if both parties are to be satisfied.
A step-by-step example will make the process clear.
• Rashid in Riyadh agrees to purchase machine parts from a company based in Manchester, UK.
• Rashid visits his bank in Riyadh and obtains a letter of credit.
• The letter of credit is sent to the supplier’s bank in the UK.
• To obtain the money the supplier sends the goods to Riyadh and confirms by giving the shipping documents including the certificate of insurance to the bank.
• The UK supplier receives his money.
• The UK bank sends the shipping documents to Riyadh.
• The goods are in transit between UK and Riyadh
• The goods arrive.
• To collect his goods Rashid needs the shipping documents, to collect these he needs to pay the bank in Riyadh.
• Therefore, the supplier gets his money from the bank, the bank collects the money from the buyer and the buyer collects the documents from the bank and collects his goods, so every party is satisfied with the transaction.
The journey from the UK to Saudi Arabia could take several weeks. If there is a problem e.g. the boat sinks or an accident destroys the goods, the banks and/or Rashid have lost their money. Consequently, the banks will require a marine insurance policy to cover the goods during the journey. The certificate of insurance is an essential part of the shipping documents and is proof that a policy is in force.
As the certificate of marine insurance is part of the shipping documents if the goods change hands, the insurance certificate also changes hands with the goods. This is different from other classes of general insurance (non-life – Protection and savings) business. If a motorcar or a building is sold, the insurance is not sold with the property. The identity of the policyholder is an important underwriting consideration for insurers and they may not wish to give cover to the new owner.
Why do you think that a bank involved in an international transaction will insist on marine cargo insurance?
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Generally, policyholders notify insurers (or their brokers) of a claim by telephone who send a claim form to the insured for completion and return. To satisfy the claim notification condition the insured should return the claim form within a reasonable time.
Typical questions on a property claim form and their reason for insurers asking them include:
• Name, address and policy number - enables insurers to locate the underwriting file
• Date of Loss - to check if the loss occurred during the insurance policy period.
• Cause of Loss – to ascertain if the peril is insured
• Details of damaged property – to check that the policy insures it
• Insured’s relationship to the property – check on policy cover and insurable interest
• Value of the property – to check the sum insured and for average.
• Cost of repairs or replacement – the basis of the insured’s claim
• Details of any other party involved – checking for possible recovery through subrogation
• Other insurances – to check for double insurance
A liability claim form will ask for details of the incident and extent of injuries or property damage to third party as a guide to the size of the claim expected.
Once a claim form is received by the claims department, the claims adjuster will make a number of checks before proceeding. Typically, these are:
• That there are no outstanding premiums
• Loss date is within the period of insurance
• Name, address, occupation, previous claims, and other information agree with the underwriting file
• Cause of loss is an insured peril
• There is no breach of a warranty or condition
• That the sum insured (for property insurance) is adequate
• The amount claimed is reasonable
In the event of doubt of any of these issues, further enquiries may be necessary.
Some claims do not require a claim form. Large losses where loss adjusters are carrying out a detailed investigation make a claim form unnecessary.
What action would you recommend if the information on the underwriting file contradicts the Learning objective
Introduce trainee to the claim model and its components, and the procedures that are carried out by the insurance company to settle the claim.
3.9 The Importance and the Content of Claim Forms
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The majority of policies run for 12 months. There is no obligation on either side to renew unless otherwise stipulated for in the regulations or the contract.
The code of Market conduct regulation in the KSA stipulates that “Companies must inform customers of the policy renewal or expiry date in a timely manner to allow customers to arrange continuing insurance coverage”.
Also article 7 of the Unified Compulsory Motor Insurance Policy in the KSA stipulates that “The insurer shall notify the insured of the expiry date of the policy (20) working days before it expires, so that the insured can renew or replace the Policy with another policy from another insurer”. The insurer will issue a renewal notice just before the renewal date (three to four weeks is a typical period), which brings to the insured’s attention that the period of insurance is ending and indicating the renewal premium required. There is no obligation to issue a renewal notice, but it is clearly in the insurer’s interests for retention of the business.
The renewal notice will indicate the premium required by insurers to continue the insurance for a further 12 months. It will contain brief details of the insurance, policy number and possibly where and how to pay. The renewal notice may also contain a warning or reminder to the insured of the duty of utmost good faith and that he must notify any changes or alterations to the risk.
The new period of insurance is a new contract, albeit with the same terms and conditions as the expiring contract.
What effect does the renewal, being a new contract, have on the insured’s duty of utmost good faith?
Learning objective
3.10 The Importance and the content of Renewal Invitations
Illustrate the benefit of renewal invitations and why it is used in the insurance company
Many insurers will insist that they receive the renewal premium before the renewal date. If there is non-payment, then the implication is that the insured does not want to renew the insurance and the policy will lapse.
There are cases however, when the insured has not paid the premium by the due date but it is his intention to renew. The renewal notice may have been lost, the insured was on holidays when the notice arrived or the check for payment may be missing. To take all this into consideration, Insurance companies allow a period of time, (7 to 14 days is typical but could be 30 days) for the insured to pay the premium. This is known as the grace period, during which if the premium is paid the policy will continue without any interruption in cover.
Grace period do not apply, if the insured indicates that it is not their intention to renew.
Learning objective 3.10.1 Grace Period
Identifying the grace period, when the insurance company provides it to its clients, and what is the benefit of doing so?
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Long-term agreements are agreements between the insured and insurer whereby the insured agrees to offer the risk for insurance to the insurer for a stated number of years (three is typical) at the same terms and conditions in force at expiry. In return, insurers offer a premium discount (%5 or even %10).
Insurers do not have to accept the offer, and if insurers revise the terms and conditions of the insurance, this becomes a counter offer and the insured does not have to accept the new terms.
Long term agreements help insurers retain business, especially on a large commercial contract where the expenses of surveying and policy preparation are incurred in the first year.
Both sides benefit from a long-term agreement, the insured from the reduction in premium and the insurer retains the business.
Long-term agreements are not long-term contracts, each contract is for 12 months, the agreement is simply an opportunity for the insurer to retain business while the terms of the policy remains unchanged.
Learning objective
3.11 Long-Term Agreements: Invitations
Illustrate a long-term agreement and when the insurance company offers this agreement to the client, and the mutual benefits of both parties (insured – insurer) The Finance Director of a company returns from vacation on the 5th of September and discovers the renewal notice for the company’s public liability on his desk. The renewal date was 1st of September and he immediately prepares a bank check and sends it to insurance company by messenger. Several weeks later, a customer makes a claim against the company alleging injuries received in a showroom on the 3rd of September two days before the premium was paid. Do you think insurers will deal with claim? Give reasons for your answer.
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