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P85 Claims Practice

Legal Principles

Insurable Interest

Your knowledge of Insurable Interest is assumed from previous CII studies. For a summary

see Section A in Chapter 3 of the CII P85 Textbook – as you can see, it is not covered in any

detail.

1. See Activity 1 in Page 3/2 of the CII P85 Textbook. Be ready to discuss your answer to

this question in our next session.

Formation of the Contract

This chapter deals with Offer and Acceptance and Consideration. Once again, this is not

covered in any great detail but see Section B in Chapter 3 of the CII textbook.

2. What happens if the policyholder makes a claim before paying the premium?

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Utmost Good Faith

Although this is another subject where your knowledge can be assumed from previous

studies and is covered in a little more detail in the course. It will be particularly important to

be aware of key case law on the subject.

We will deal with ‘Disclosure and Representations’ in consumer insurance contracts later in

the chapter.

3. Claims handlers compare the information given at the claims stage with the

information given during the proposal stage. List the three questions they will need

to consider when doing this.

4. What was the outcome of Pan Atlantic Insurance Co v Pine Top Insurance Co (1994)?

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5. Make notes on the case of Limit No.2 Ltd v AXA Versicherung Ag (2008). Be ready to

discuss this in next week’s session.

6. Make notes on the case of North Star Shipping Ltd & Ors v Sphere Drake Insurance

Plc & Ors (2006). Be ready to discuss this in next week’s session.

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Activity:

Make sure that you are familiar with the requirements of ICOBs and the Consumer

Insurance (Disclosure and Representations) Act 2012. You should also familiarise yourself

with the approach taken by FOS in the context of non-disclosure and misrepresentation.

These links will help. You will also find links to this information in iStudyAid.

http://fshandbook.info/FS/html/handbook/ICOBS/8/1

http://www.legislation.gov.uk/ukpga/2012/6/contents

http://www.financial-ombudsman.org.uk/publications/technical_notes/misrepresentation-

and-non-disclosure.htm

Waiver and Estoppel

7. Why is it important for an insurer to reserve its rights in this way?

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8. What are the implications for insurers as a result of the Kosmar case?

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Proximate Cause

Activity: Remind yourself of the work you have done on proximate cause in previous

modules as we will not cover it in detail here. You should also remind yourself of what

happens when concurrent causes combine to cause loss(es).

Case Law

9. During WWI an enemy torpedo hit a ship called the Ikara. It suffered heavy damage but

managed to make it to the port of Le Havre.

Repair work had started but the harbour master ordered the ship to be moved to an

outer berth when a storm was forecast. This was so that it would not block the harbour

if it were to sink.

The ship did sink during the storm (whilst at the outer berth).

The owners made a claim under their Marine Insurance which covered perils of the sea

but which excluded war risks.

What was the outcome of this case, and why was this important?

10. Midland Mainline Ltd & Others v Eagle Star General Insurance Co Ltd 2004

A train bound for Leeds was when it derailed south of Hatfield station. The primary

cause of the accident was later determined to be the left-hand rail fracturing as the train

passed over it. Four passengers died in the accident and a further seventy were injured

As a result of this disaster, the operators of the rail network imposed a number of

emergency speed restrictions at other sites where similar cracking to the rails were

identified. This caused serious disruption and delay.

Midland Mainline made claims under their business interruption insurance. The policy

excluded losses caused by wear and tear.

a. What was the outcome of this case at the trial?

b. What was the result on appeal?

c. What is the implication of this case for claims handlers?

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Warranties

11. What are the three main types of warranty?

12. What is the effect of a breach of warranty? See Bank of Nova Scotia v Hellenic Mutual

War Risks Association (Bermuda) Ltd (The Good Luck) 1992

13. John Thomas Pratt v Aigaion Insurance Co SA (2008)

A marine insurance policy contained this warranty:

‘Warranted Owner and/or Owner’s experienced skipper on board and in charge at all

times.’

The vessel insured under the policy returned from a trip. While all crew members were

ashore for the evening it caught fire.

The insurer took the position that this was a breach of warranty. The insured did not

agree and sued the insurer.

a. What was the outcome of the trial?

b. What was the outcome on appeal?

c. What was the logic behind the decision of the Court of Appeal?

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14. GE Frankona Reinsurance Ltd v CMM Trust No. 1400 (The Newfoundland Explorer) 2006

A marine policy for a yacht contained this warranty.

‘Warranted fully crewed at all times’

The yacht was badly damaged by fire when there were no crew on board. The fire was

caused by a generator that had overheated.

The proposal form stated that there was one full time crew member for the yacht and two

occasional crew members.

At the time of the fire the captain was visiting his home 15 miles away. He had been on the

vessel earlier in the day and returned to it later.

The insurers argued that the warranty required at least one crew member to be on board at

all times to deal with emergencies or other situations requiring attention. They also argued

that this meant employing enough crew to look after the vessel properly.

a. What did the court decide?

b. What was the logic for the decision?

15. What are the implications, of these two cases, for insurers?

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16. GE Reinsurance Corporation (formerly known as Kemper Reinsurance Company) v Royal

and Sun Alliance Insurance Plc & Others 2003

This was a film finance reinsurance case. The insurance related to debt obligations for a film

company called Destination.

The policy contained this warranty:

‘Contract of employment in respect of S as Chief Executive Officer…to be maintained for the

duration of the policy.’

The reinsurance contract covered a five year period. A into this contract, S left Destination’s

employment.

The reinsurers considered this to be a breach of warranty.

a. What did the court decide?

b. What was the reason for the decision?

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17. Matthew Bennett (t/a Soho Pizzeria) v Axa Insurance Plc 2003

A commercial ‘all-risks’ policy contained this warranty:

`` Waste Clause

It is warranted that

(a) all greasy cloths will be placed in lidded metal bins

(b) all trade waste be swept up and bagged daily following or by the end of the day's

trading and removed to a secure waste disposal area or designated storage building

pending removal from the premises.''

In the early hours of Wednesday 11 April 2001 the restaurant was severely damaged by a

fire which developed after the restaurant had closed at the end of the previous evening's

trading.

The insurer alleged that trade waste was left in a waste bin in what has been called the

preparation area after the staff left and locked the restaurant at about 0030hrs on 11 April.

The fire started in that bin.

a. What did the court decide?

b. What was the logic for the decision?

Activity: Work through the activity outlined in page 3/14 of the CII P85 textbook.

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Conditions

Once again, it is assumed that you have covered the subject of policy conditions in an earlier

module. It is dealt with in IF1 and in more detail in PO5.

18. To what extent does the insurer have to show it was prejudiced if there has been a

breach of a condition precedent?

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19. Pioneer Concrete Ltd v National Employers’ Mutual General Insurance Association

Limited 1985

There was a condition precedent to liability requiring prompt notification of claims. In this

case a delay in notifying a claim had not effect whatsoever on the insurers handling of a

third party claim. In other words, they were not prejudiced by the delay.

Nevertheless, the insurer declined the claim.

a. What was the outcome of the court case?

b. What was the logic?

Exclusions

Activity: See example 3.2 on page 3/16 of the P85 textbook and make notes. Many of the

claims resulting from Hurricane Katrina were declined. Consider why this was the case.

Also research Storm Sandy and complete the activity on page 3/17 of the P85 textbook.

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20. Wayne Tank and Pump Co Ltd v Employers Liability Insurance Corporation 1974

Wayne Tank and Pump Co Ltd, had built a storage tank. A fire, started in the tank and

destroyed a plasticine factory. The fire had two causes:

The tank was defective

A negligent employee had left the equipment switched on overnight

The insurance policy covered liability for negligence but excluded liability for defective

equipment.

a. What was the outcome of the court case?

b. What was the logic?

c. What was the obita dictum?

21. J J Lloyd (Instruments) Ltd v Northern Star Insurance Co Ltd 1987 (also known as The Miss

Jay Jay)

A yacht was damaged during bad weather. It was also established that a defective design

also contributed to the yacht.

The marine policy covered perils of the sea but did not mention defective design at all.

a. What was the outcome of the court case?

b. What was the reason for this result?

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22. Tektrol Ltd v International Insurance Co of Hanover Ltd and Great Lakes Reinsurance (UK) Ltd

2004

Tektrol had a combined ‘all-risks’ policy. They made a business interruption claim under

that policy.

The claim was for the loss of a source code. Tektrol had kept five copies of this code. Four

were held on four different computers. The fifth was a paper copy.

Within a three week period they lost all of those copies as a result of two incidents:

A computer virus in an e mail

A burglary

The insurance policy contained these words:

…erasure loss distortion or corruption of information on computer systems…caused

deliberately by…malicious persons’ and for loss of information on computer systems unless

resulting from a ‘Defined Peril’ in so far as it was not otherwise excluded…

a. What did the court decide in this case?

b. What was the logic?

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23. Bankers Insurance Co Ltd v Patrick South and Mark Ian Gardner 2003

This was about a jet-ski accident in which South and Gardner were seriously injured.

A liability claim had been made by one of the injured men, against the other. The issue the

court had to decide was whether the liability section of the Travel insurance would cover

this.

The policy excluded claims relating to the use of ‘waterborne craft’.

a. What did the court decide?

b. What was the logic?

24. Blackburn Rovers Football and Athletic Club Plc v Avon Insurance Plc and others 2004

Blackburn had an insurance policy covering them if illness or injury disabled a player from

playing for them. In 1997 a player by the name of Martin Dahlin injured his back in a

practice match. The injury ended his career.

The insurer declined the claim on the grounds that the disability was not caused by the

injury alone. They argued that the player had a degenerative condition of his lower spine

that directly or indirectly contributed to the injury.

The policy excluded ‘Permanent Total Disablement which was attributable directly or

indirectly to … degenerative conditions.

a. What did the court decide?

b. What was the logic for this decision?

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25. C A Blackwell(Contracts) Ltd v Gerling Allgemeine Versicherungs-Ag 2007

This was a claim for damage caused to road construction works by heavy rainfall. Although

the rainfall was heavy, it had not been exceptional, without precedent or unforeseeable.

The policy excluded ‘liability to property in a defective condition due to defective design

plan specification, materials or workmanship.

a. On what grounds did the insurer decline the claim?

b. What did the court decide?

c. What was the logic for this decision?

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Assignment 3 – Past exam questions

1. John’s personal insurance policy contains a clause which states that ‘it is a condition precedent to

liability under this policy that you must notify any claim to the insurer as soon as practicable’.

Explain the purpose and effects of this clause. (12)

2. Explain why a claims handler may advise an insured that the insurer’s rights are reserved. (12)

3. Identify the key case relating to breach of warranty and summarise the principle of insurance law

established in that case. (6)

4. Explain why a claims handler should advise underwriters about a material non-disclosure found on

a current policy. (9)

5. Sporty plc, a large multinational leisure operator, has a commercial combined policy with XYZ

Insurance plc (XYZ). The policy contains a warranty that all gym equipment will be inspected daily. A

customer is injured using faulty gym equipment. XYZ investigate the claim and discover that the

equipment had not been inspected for several days.

(a) Explain briefly the purpose of this warranty. (3)

(b) Outline the coverage position that XYZ will take. (3)

(c) Describe briefly how your answer would differ if Sporty plc is a micro enterprise. (4)

6. Explain why insurance policies typically include clauses requiring prompt notification of any loss.

(8)

7. Robinson Ltd has an insurance policy which excludes damage caused by flood but covers damage

caused by wind. Robinson Ltd submits a large property claim to their insurer after bad weather

damages their premises. The insurer investigates and determines that the loss was caused by the

combination of wind and flood; and that neither would have caused damage on their own.

Explain the legal principles which will apply to Robinson Ltd’s claim in this situation, citing case law in

support of your answer. (12