a simple guide to getting it right when buying insurance

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A History of Insurance and The Principles


Insurance in the UK mainly came about following the Great Fire of London in 1666 where approximately 13,000+ homes were destroyed, although there is evidence of individuals insuring ships or lives prior to this date. It was the Great Fire that brought about the start of personal lines insurance, initially it was just fire insurance for houses. By the end of 1667 around 5,000 Fire Insurance policies had been sold.Painting of Lloyds coffee house london by william holland - By William Holland (1789) [Public domain], via Wikimedia Commons


By the late 1680's as London became an important global trade centre, there was a higher demand for Marine Insurance for vessels and cargo too. Around this time Edward Lloyd opened a coffee shop which became the place for ships Captains, owners and merchants to meet and gain the most up to date shipping news. It was the natural and convenient place for those wanting to insure their vessels and cargo to meet with would be underwriters (these were the people who literally wrote their name under the risk on a Lloyd's slip specifically made for the purpose of what was to be insured and what terms might have been agreed) who were prepared to cover the merchants, traders and adventurers' wares and property.


Lloyd's of London is probably the most famous insurance institution in the world and still insurers marine and other more unusual kinds of risks. Lloyd's of London is an insurance market and not an insurance company, and they do still have underwriters who cover motor insurance, however, the direct or larger private motor insurers are generally not found at Lloyd's these days.

Lloyd's of London at Night By Lloyd's of London [CC BY 2.5 (http://creativecommons.org/licenses/by/2.5)], via Wikimedia Commons

Motor insurance has been available in the UK for many years. After the First World War more people could afford cars and as such there were more accidents.  This brought about an increased need for insurance to compensate the victims of road accidents. A law was introduced in 1930 called the Road Traffic Act, which said "all those who use a vehicle on a road should have insurance in respect of their liability for death of or bodily injury to third parties". The law was also extended to include damage to property in 1988.


There were six basic Principles of Insurance which applied to Motor Insurance and were the foundation for the insurance business.

Principles of Insurance are:

Insurable Interest

The principle, in its basic form means "a legal right to insure".

This can be defined as-

"The legal right to insure arising out of a financial relationship recognised by law, between the law and the subject matter"

This should include:

A Subject Matter: This is the item or event insured by the insurance contract i.e. the car, house, buildings, belongings, pet, holiday etc insured for storm, flood, fire, theft, illness etc.

A Legal Relationship: The relationship between the insured (you or a company/business) and the subject matter of insurance (the car, house, buildings, belongings, pet, holiday etc) and must be recognised by law (i.e. you cannot insure something you don't own or have no financial interest in).

Financial Value: essentially; insurance interest in the subject matter must have a financial value.

Utmost Good Faith (this no longer exists - see The Consumer Insurance (Disclosures and Representations) Act 2012))


This was defined as:

A positive duty to voluntarily disclose, all material facts for the risk or risks that are being proposed; whether asked or not. As such, if you were not sure then you should’ve disclosed it.


Utmost Good Faith applied to you (the proposer) and the Insurer throughout the term of the insurance contract.


This is why insurance became very complex, with the insurer being reliant on you giving the full details so they can charge the correct premium. But we’re not all underwriters, so knowing what to disclose and what not was considered unfair to the consumer.


Prior to 2012 the details you advised had to be true and accurate to the best of your belief, as you're the only person who truly knows the facts about what you want to insure. It was relied upon that the buyer should disclose all material facts that a prudent underwriter would want to know, but as most people would not know what a prudent underwriter might consider to be a material fact, a new act was brought in.


The Consumer Insurance (Disclosures and Representations) Act 2012 received Royal Assent on 8 March 2012 and it came into force on 6 April 2013. This swung the balance of onus onto the insurer, so now if the insurer has not asked the question, you do not need to volunteer the information. Which means it is wholly the insurers, brokers or intermediaries responsibility to ask all of the questions and not rely upon you to be forthcoming with things you’re not sure needs disclosing. This will is good for the buyers of insurance, althoug OddsMonkey h, insurers may have increased premiums to ensure they have a "buffer" for uncertainty as it's not reasonable for them to ask every question about you.




Indemnity

Indemnity is a core principle, which applies to all policies. It means "to put you back in the same position that you enjoyed financially prior to the loss!". You should not profit from a loss as this is against public policy.


There are four main ways that an insurer can provide indemnity:


Insurers normally repair a vehicle or property if it is economically viable to do so. If not they may give you a cash settlement; especially if the item is stolen this would likely be the case.

A policy normally has an excess (your contribution to the claim). In addition to this, you may have opted for a voluntary excess to reduce your premium.  This stops small claims being made which costs the insurers too much in administering the claim.

Replacement and re-instatement are rarely used other than for policies that have "New Car Replacement" see Terms for a full definition of this.

Contribution

If you had two policies that could potentially cover the same item, maybe Home Contents with worldwide personal effects cover and a Travel Insurance policy with personal effects cover for something stolen while on holiday abroad, i.e. a camera stolen from you in the street. Which insurer should provide indemnity?


The law states: "Where there is more than one insurance in force, the liability of the insurer is limited to his proportion of the loss". This usually isn't an issue in practice for motor insurers, as there are usually clauses in their policies to say the most relevant policy applies, or agreements between insurers whereby they divide the costs proportionately.


In real terms your Travel Insurance cover probably wouldn't be sufficient to cover your camera as there limits are generally these are very low i.e. £250.00 and you would have an excess of £50.00+. If your camera was worth more than this then (remember this would be the replacement as new cost) they (the Travel Insurers) would decline to pay and your Personal Effects cover on you Home Insurance policy will be prevalent.

Subrogation

Subrogation only applies if there is a Contract of Indemnity.


Subrogation is where the insurer can take control of the claim before your claim has been settled, this can include their attempts to make any recovery from a Third Party insurer/s. The insurer would normally make you aware that they are going to do this and is usually only undertaken when they believe it will be in their interest to do so, insofar as keeping their costs to a minimum. Also, if you have started to claim against the third party directly for your damages when the insurer (your insurance company) is already dealing with your repairs, in which case you would be over compensated for the loss.

Proximate Cause

This in its most basic terms is what caused the claim to occur. The insurers will look to see if a loss is covered, by determining if the insured Peril is linked to the loss. The proximate cause is the most dominant cause and must be a link between the cause and the loss.


It could be that there is more than one event involved in the loss. The classic firecracker is an example common to most insurance professionals when learning about the principles of insurance. A child lights a firecracker, then fearing that the firecracker will explode in his or her hands, tosses the firecracker to a second child. The second child also fears the impending explosion and proceeds to toss the firecracker to a third child. This third child is the unlucky recipient of the firecracker at the moment of explosion; a loss occurs as the child is injured.


Proximate cause becomes apparent in deciding who is responsible for the injuries to the third child. The direct cause is very easy to connect to the loss. The second child tossed the firecracker to the third child knowing that there would be an explosion. This act demonstrates either malicious intent or at least a degree of wanton disregard for another's safety. The second child is then directly responsible for the third child's injuries; the direct cause of loss is clear.

The legal outcome regarding responsibility may extend to additional parties, in this case the first child. The first child began the chain of events by lighting the firecracker and then throwing it to the second child. The first child knew that this act would endanger someone else if they received the firecracker. It may not matter that the first child tries to argue that they had no way of knowing that the second child would throw the firecracker and injure someone else. The first child's action began a direct series of events that resulted in the loss; the proximate cause has been determined.