THE CHARTERED
INSURANCE INSTITUTE
DIPLOMA IN INSURANCE
P05 – INSURANCE LAW
EXAMINATION GUIDE
OCTOBER 2009
SPECIAL NOTICE
Candidates entered for the April 2010 examination should study this Examination
Guide carefully in order to prepare themselves for the examination.
Practice in answering the questions is highly desirable and should be considered a
critical part of a properly planned programme of examination preparation.
CONTENTS
Important guidance for candidates........................................................................................3
Question paper..........................................................................................................................6
Examiner’s comments............................................................................................................13
Model answers........................................................................................................................16
Published by: The Chartered Insurance Institute 20 Aldermanbury London EC2V 7HY
020 8989 8464
© The Chartered Insurance Institute 2010
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IMPORTANT GUIDANCE FOR CANDIDATES
Introduction
The purpose of this Examination Guide is to help you to understand how examiners seek to
assess the knowledge and skill of candidates. You can then demonstrate to the examiners that
you meet the required levels of knowledge and skill to merit a pass in this unit. During your
preparation for the examination it should be your aim not only to ensure that you are
technically able to answer the questions but also that you can do justice to your abilities under
examination conditions.
Before the examination
Make sure you have a copy of the current Diploma in Insurance
Information for Candidates
Details of administrative arrangements and the regulations which form the basis of your
examination entry are to be found in the current Diploma in Insurance Information for
Candidates brochure, which is essential reading for all candidates; it is available online at
www.cii.co.uk or from Customer Service.
Study the syllabus carefully
It is important to study the syllabus, which is available online at www.cii.co.uk or from
Customer Service. The questions in the examination paper are based directly on the syllabus,
so it is vital that you are familiar with it.
Read widely
Your knowledge should be wider than the scope of one book. While books specifically
produced to support your studies will provide coverage of the syllabus areas, you should be
prepared to read around the subject. A reading list can be found at the end of the syllabus.
Make full use of the Examination Guide
The best way to understand what the examiners require is to study the CII Examination
Guides, and you can obtain copies online at www.cii.co.uk. You can use Examination Guides
as ‘mock’ examination papers, attempting them under examination conditions as far as
possible, and then comparing your answers to the model ones. The examiners’ comments on
candidates’ actual performance should be noted.
Understand the nature of assessment
Each Examination Guide contains a full examination paper and model answers. The model
answers show the type of responses the examiners are looking for, and which would achieve
maximum marks. However, you should note that there are alternative answers to some
question parts which would also gain high marks. For the sake of clarity and brevity not all of
these alternative answers are shown.
Know the structure of the examination
Familiarise yourself with the structure of the examination paper and the time allowed to
complete it. This information can be found on the question paper included within each
Examination Guide.
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In the examination
Do justice to yourself in the examination
Assuming you have prepared adequately, you will only do justice to yourself in the
examination if you follow two common sense rules:
Spend your time in accordance with the allocation of marks as indicated on the paper.
If you do not complete the whole paper, your chances of passing may be reduced
considerably. Do not spend excessive time on any one question. If you have used up
the time allocation for that question, leave some space, go on to the next question, and only
return to the incomplete question after you have completed the rest of the paper. The
maximum marks allocated to each question and any constituent parts are given on the paper;
the number of marks allocated is the best indication of how much time you should spend
answering it. If part of a question has just two marks allocated, there are likely to be only one
or two points for which the examiner is looking, so a long answer is a waste of time.
Conversely, if part of a question has, for example, eight marks allocated, a couple of lines
will not be an adequate answer.
1
Take care to answer the precise question set. You will see that the model answers
provided in this Examination Guide are quite focused and precise; alternative answers
would only be acceptable if they still answer the question. However brilliantly you
write on a particular topic, if it does not provide a satisfactory answer to the precise question
as set, you will not score the marks allocated. Many candidates leave the examination room
confident that they have written a ‘good’ paper, only to be mystified when they receive a
disappointing result. Often, the explanation for this lies in a failure to think carefully about
what the examiner requires, before putting pen to paper.
2
Order of tackling questions
Tackle the questions in whatever order you feel most comfortable with. Generally, it is better
to leave any questions which you feel less confident in answering until you have attempted
those with which you are more familiar, but remember not to spend excessive time on your
‘good’ questions.
Handwriting
Provided your handwriting is legible, you will not lose marks if it is untidy. We recommend
that you do not write in block capitals, because you will be slowed down so much by doing
so and, paradoxically, block capitals can become more difficult to read than joined-up writing
when done quickly.
Answer format
Unless the question requires you to produce an answer in a particular format, such as a letter
or a report, you should use ‘bullet points’ or short paragraphs, since this allows you to
communicate your thoughts in the most effective way in the shortest time. The model
answers give an indication of which style is acceptable for the different types of question.
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Calculators
If you bring a calculator into the examination room, it must be a silent, battery or solar
powered, non-programmable calculator. The use of electronic equipment capable of being
programmed to hold alphabetical or numerical data and/or formulae is prohibited. You may
use a financial or scientific calculator, provided it meets these requirements. It is important
that you show all the steps of any calculation in your answer. The examination is testing your
ability to carry out all the appropriate steps in calculating a value. A proficient mathematician
is someone who follows the correct method, i.e. carries out the appropriate steps. The
majority of the available marks will be allocated for demonstrating the correct method of
calculation.
After the examination
All Diploma in Insurance examiners, one of whom will mark your answer book, are either
active practitioners in the insurance industry or are experts on the subject. They have been
specially trained to mark papers using a detailed marking scheme: the model answers in
Examination Guides are based on those marking schemes.
The marking of each examiner is closely monitored throughout the marking period and all
marked answer books are carefully checked. This process means that all answer books are
marked to the same standard.
After all the answer books have been marked, a moderation meeting is held, at which all
available statistical information is considered, together with the views of the Senior Examiner
for that unit and other assessment experts. At the meeting a pass mark is set to ensure that the
standard of knowledge and skills required to gain a pass in the paper is comparable with that
of previous papers. All candidates at or above the agreed pass mark will pass: the CII does
not operate a quota system whereby only a fixed percentage of candidates can pass a paper.
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P05
THE CHARTERED INSURANCE INSTITUTE
DIPLOMA
OCTOBER 2009 EXAMINATION PAPER
UNIT P05
INSURANCE LAW
INSTRUCTIONS
• Three hours are allowed for this paper.
• Fill in the information requested on the answer booklet and on form B.
• You are allowed to write on the inside pages of this question paper but you must NOT
write your name, candidate number, PIN or any other identification anywhere on this
question paper.
• The answer booklet and this question paper must be handed in personally by you to
the invigilator before you leave the examination. Failure to do this may result in your
paper not being marked and you may be prevented from entering this examination in
future.
READ THE INSTRUCTIONS OVERLEAF CAREFULLY BEFORE ANSWERING
ANY QUESTIONS.
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THE CHARTERED INSURANCE INSTITUTE
P05 – Insurance law
CANDIDATE INSTRUCTIONS
READ THE INSTRUCTIONS BELOW BEFORE ANSWERING ANY QUESTIONS.
Three hours are allowed for this paper. You should answer all questions in Part I and two out
of the four questions in Part II.
The paper carries a total of 200 marks, as follows:
Part I
Part II
14 compulsory questions
2 questions selected from 4
140 marks
60 marks
You are advised to spend no more than two hours on Part I.
Answer each question on a new page. If the question has more than one part, leave several
lines blank after each part.
It is important to show each step in any calculation, even if you have used a calculator.
You may find it helpful in some places to make rough notes in the answer booklet. If you do
this, you should cross through these notes before you hand in the booklet.
© The CII Examinations Department, 20 Aldermanbury, London EC2V 7HY
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PART I
Answer ALL questions in Part I.
Each question is worth 10 marks.
Note form is acceptable where this conveys all the necessary information.
1.
2.
3.
4.
5.
Explain briefly each of the following in the context of the doctrine of
precedent in English law:
(a)
ratio decidendi;
(5)
(b)
obiter dicta.
(5)
(a)
List five essentials for the formation of a valid contract.
(5)
(b)
Distinguish between a bilateral and a unilateral contract, giving an
example of the latter.
(5)
List five examples of circumstances in which an insurance intermediary is
likely to be regarded as the agent of the insurer, rather than the agent of the
proposer.
(10)
Describe briefly and explain the legal function of TWO of the following
institutions:
(a)
The Law Commission.
(5)
(b)
The House of Lords.
(5)
(c)
The Council of the European Communities.
(5)
(a)
Describe briefly the effect of illegality on a contract.
(4)
(b)
Outline three sets of circumstances in which an insurance contract
might be illegal.
(6)
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6.
Outline the principle(s) of law illustrated by ONE of the following cases:
(a)
(b)
7.
8.
10.
(10)
Napier v Hunter (1993).
(10)
Outline the main provisions of the Contracts (Rights of Third Parties) Act
1999 and explain its effect on the law of contract.
(a)
(b)
9.
Overseas Tankship (UK) Ltd v Mort’s Dock and Engineering Co. Ltd
(‘The Wagon Mound’) (1961);
Explain briefly and distinguish between vicarious liability and strict
liability.
(4)
List one example of vicarious liability and two examples of strict
liability drawn from English law.
(6)
Explain briefly the ‘Hedley Byrne’ rule and comment on its effect in the law
of torts.
(a)
(b)
Outline the conditions that must be fulfilled for contribution to arise
between two or more insurance policies at common law.
(10)
(5)
Exaco, a manufacturing firm, has two public (general) liability
insurance policies. The first policy, written by Republican Insurance,
has an indemnity limit of £100,000 and the second policy, written by
Crowned Insurance, has a limit of £500,000. Each policy carries a
contribution condition to the effect that the insurer will be liable for a
‘rateable proportion’ only of any loss that is insured by another policy.
Exaco incur a loss of £66,000 that is covered by both of these policies.
Calculate the liability of each insurer for the loss, assuming that the
contracts are governed by English law. Show all your workings.
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(10)
9
(5)
11.
(a)
(b)
12.
13.
Explain what is meant by ‘waiver by estoppel’ in relation to breach of
warranty.
(5)
List five examples of circumstances in which such waiver may be
deemed to have occurred.
(5)
Explain briefly each of the following in the context of the law of agency:
(a)
usual authority;
(5)
(b)
agency by necessity.
(5)
Peter, an elderly man, has a personal accident insurance policy which covers
death and disablement caused by ‘accidental, external, visible and violent
means’. He is involved in a car accident and suffers injuries that require
hospital treatment.
While in hospital he contracts the ‘superbug’ MRSA – a bacterial infection
which is common in hospitals and highly resistant to antibiotics. Being
elderly and in a weakened state from the accident, he dies as a result.
Discuss whether the personal accident insurers are liable under the policy.
Illustrate your answer with the legal principles and appropriate case law
involved.
14.
(a)
(b)
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(10)
Explain the operation of the literal rule in relation to disputes
concerning the interpretation of documents.
(6)
Give an example of the literal rule drawn from insurance case law.
(4)
10
PART II
Answer TWO of the following FOUR questions.
Each question is worth 30 marks.
15.
(a)
(b)
16.
Explain the doctrine of salvage and abandonment, and compare and
contrast the operation of the doctrine in marine and non-marine
insurance.
(20)
Compare and contrast the doctrine of subrogation with the doctrine of
salvage and abandonment.
(10)
‘Under the general law, contract terms divide into conditions – which are
important because a breach will allow the injured party to avoid the contract,
and warranties – which are not so important because a breach will only give
rise to a claim for damages. In insurance, it is simply the other way round.’
Discuss.
17.
(a)
(30)
‘The very foundation, in my opinion, of every rule which has been
applied to insurance law is this, namely that the contract of insurance
... is a contract of indemnity and of indemnity only ... and if ever a
proposition is brought forward which is at variance with it, that is to
say, which either will prevent the assured from obtaining a full
indemnity or which gives the assured more than a full indemnity, that
proposition must certainly be wrong.’
(Brett, L. J. in Castellain v Preston (1883))
(b)
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Discuss whether this statement provides an adequate summary of the
principle of indemnity.
(15)
Discuss the factors which determine the measure of indemnity when a
building insured on an ordinary indemnity basis is damaged or
destroyed. Illustrate your answer with case law.
(15)
11
18.
(a)
(b)
(c)
Explain briefly why the law requires a person to have an insurable
interest in the thing or event that he insures.
(5)
Explain the aspect of the law relating to insurable interest that is
illustrated by the case of Macaura v Northern Assurance Co Ltd
(1925).
(5)
Michael wishes to effect the following insurance policies. In each case
state whether he is legally entitled to do so under English law, giving a
reason for your answer.
(i)
(ii)
(iii)
(iv)
(v)
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A policy on the life of the elderly judge who is hearing a
complex case which Michael has brought against a business
associate, Jack.
(4)
A policy on the life of Jill who, according to Michael, owes him
£100,000 (though Jill disputes this).
(4)
A policy on the life of Dan, an odd-job man who occasionally
does some work around the house for Michael in exchange for
small payments.
(4)
A policy on the life of Michael’s son, Christopher, whom
Michael is relying on to look after him when he gets old.
(4)
A policy on the life of Michael’s 97-year-old Aunt Florence,
who has promised to give Michael £10,000 on her 100th
birthday, provided that Michael is good to her.
(4)
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NOTE ON MODEL ANSWERS
The model answers given are those which would achieve maximum marks.
However, there are alternative answers to some question parts which could also gain
high marks. For the sake of clarity and brevity not all of these alternative answers are
shown. An oblique (/) indicates an equally acceptable alternative answer.
EXAMINER’S COMMENTS
The general standard of the papers was good, being broadly similar to that of previous
examination sittings. However, as is always the case, the marks gained covered a very wide
distribution. There were some excellent scripts, well above distinction level, but also some
less satisfactory ones, where candidates did not gain high marks.
The Part I questions (questions 1-14, for each of which 10 marks were available) were
answered well by the majority of candidates, with the exceptions noted below. The questions
in this section which were not answered well, tended to be those which required the
application of knowledge to problem cases, rather than the more straightforward factual
questions.
As in all previous examination sessions, the answers to the Part II questions (15-18) were less
satisfactory. Many answers showed poor organisation and a lack of sufficient depth and
detail, which are crucially important in questions carrying a total of 30 marks each.
Many candidates did not critically evaluate a statement or proposition, such as the statements
in questions 16 and 17 (a). Questions of this sort are invitations to challenge the validity of
the statement made (i.e. to discuss the extent to which it is true and the extent to which it is
false). They are not usually invitations to simply agree with the proposition or to ‘write
everything you know about x’.
Many candidates did not gain high marks in both Parts I and II because they were unable to
cite case law effectively in support of their answers. It is impossible to learn all the cases
relating to the syllabus, but it is important to understand the principle behind the ‘landmark’
cases, especially those of insurance contract law (as distinct from the general law of contract,
tort law etc). These are relatively few in number, and many of them are decisions of the
House of Lords (now the Supreme Court).
Question 1 was a factual question. It was answered well in most cases, although many
candidates did not gain high marks because they did not make the link between the terms
featured in the question and the doctrine of precedent.
Question 2 was another factual question to which many candidates produced a sound answer.
Part (a) (a simple listing exercise) was answered well by the majority of candidates. In part
(b), some candidates got the terms the wrong way round, which suggests that they did not
know what the prefixes ‘uni’ and ‘bi’ meant. Other candidates did not explain the nature of a
unilateral contract.
The majority of candidates answered question 3 well, although some gave examples of
instances where an agent is clearly acting on behalf of the insured as well as examples where
the agent is acting for the insurer, which demonstrates some candidates did not know the
significance of the distinction.
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Question 4 was answered well by many candidates. In relation to (b) a number of candidates
discussed the function of the House of Lords in relation to the parliamentary process for the
creation of legislation, rather than the judicial function of the House of Lords (now Supreme
Court) as an appeal court. Credit was given for sound answers which took this approach.
Many candidates answered part (a) of question 5 well, the majority making the point that
illegal contracts are void. Fewer candidates discussed the question of the right to recover
money under an illegal contract. Many candidates provided two or three examples of illegal
insurance contracts, though some wrote about illegal non-insurance contracts, which was
outside the scope of the question.
Part (a) of question 6 was selected by the majority of candidates. Many candidates identified
‘foreseeability’ as an essential element in the test of remoteness established in The Wagon
Mound though fewer made the point that this test related to the type of damage and not the
person affected by the wrongdoing, thus confusing the test for remoteness with the Donoghue
test for the duty of care.
Fewer candidates chose option (b) – the Napier case. Those that did so usually wrote a
reasonable answer, but not many discussed both aspects of the decision (the origins of
subrogation and its operation as an implied term, and the problem of how a recovery is shared
between the insured and insurer where the amount recovered is less than the loss).
Question 7 was a factual question which required detailed knowledge of a particular piece of
legislation. Answers tended to be either very good – in cases where the candidate recognised
the Act in question, or very poor in cases where they did not.
Question 8 was answered well by the majority of candidates. The most common fault was
candidates not providing proper examples of strict liability. The most common (correct)
example given was liability under the rule in Rylands v. Fletcher, even though this ‘rule’ is
virtually obsolete and of very little practical importance.
Question 9 was generally answered quite well in that many candidates recognised the case
and identified at least some of the key issues that were resolved in the decision. Few
candidates gave a full account of the decision and its importance.
The majority of candidates answered part (a) of question 10 well, although many candidates
did not perform well in part (b). The most common fault was candidates not applying the
independent liability method, which is appropriate for the apportionment of liability claims
such as this. Some candidates made mistakes with the simple arithmetic.
Question 11 was not well answered. Many candidates confused waiver by estoppel with
promissory estoppel, or did not know what the term meant. However, those candidates that
correctly identified the principle in part (a) usually went on to give a good answer to part (b).
Question 12 was a factual question which was answered well by many candidates. However,
a number of candidates confused the concepts of ‘usual’ and ‘apparent’ authority in part (a).
The majority of candidates answered part (b) well.
Many candidates made a good attempt at question 13 and correctly identified the key issue as
that of ‘causation’. However, there were few very good answers, and only a small number of
candidates cited appropriate case law.
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Question 14 was not well answered by the majority of candidates. Many candidates
described rules of construction other than the literal rule in part (a) and very few gave a good
answer to part (b).
Question 15 was reasonably well answered by the majority of candidates. There was some
confusion between abandonment and salvage, and also between their application in marine
and non-marine insurance in part (a). Part (b) required some detailed technical knowledge,
but it was usually answered well.
Question 16 was also quite popular with candidates. Many candidates who attempted it
wrote a good solid answer, though few candidates produced enough depth and detail to reach
distinction level.
Relatively few candidates attempted question 17 and there were very few good answers.
Answers to part (a) were often general descriptions of the principle of indemnity, where
candidates did not analyse and criticise the statement which announces the question. A
number of candidates misread part (b) and talked about solving claims by the actual
rebuilding of the property concerned. Among the candidates who answered the question
asked, very few supported their answers with useful case law.
Question 18 was answered by the majority of candidates, and it was usually answered well by
those candidates who attempted it. Part (a) was well answered by many candidates.
However, some elaboration and explanation of the problems relating to ‘gambling’ and
‘moral hazard’ was required in order to obtain full marks, whereas some candidates gave
none. Few candidates gained high marks in part (b) – most obviously those who did not
correctly identify the Macaura case. Many candidates produced good answers to part (c)
although few produced a convincing argument in relation to part (c) (i), even though this
required only knowledge of the general principles of insurable interest, plus a little reasoning.
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Model answer for question 1
(a)
The ratio decidendi is literally the ‘reason for deciding’ a case, or the principle of law
upon which the case is based.
It is based on the material facts of the case, the decision of the judge or judges and
the reason(s) for the decision given by them. The ratio decidendi is the element that
forms the binding precedent.
(b)
Obiter dicta are ‘things said (by the judge) by the way’ – that is statements which are
not an essential part of the judgment (for example they may contain a judge’s opinion
on what the outcome of the case would have been if the facts had been different).
They do not form binding precedents, but may be persuasive; that is, influential in
guiding judges in future cases where there is no direct precedent upon which the
decision can be based.
Model answer for question 2
(a)
Any five of the following:
• There must be an agreement, which in English law is generally shown by offer
and acceptance.
• There must be the intention to create legal relations.
• There must be consideration (in the case of simple contracts).
• The agreement must be in the form required by law (if any).
• The parties must have capacity to contract.
• The contract must be legal.
(b)
There must always be at least two persons to make a contract and under a bilateral
contract each party makes a promise to the other and both are legally bound.
However, under a unilateral contract only one party is legally bound. For example, a
promise by the owner to pay a reward for lost property may be legally binding, but
only on the party who offers the reward. No-one is legally obliged to find the
property and hand it in, but the owner must pay the reward if somebody does so. Case
of Carlill v Carbolic Smoke Ball Company.
Model answer for question 3
Any five of the following:
• The intermediary has authority to handle claims.
• The intermediary has express authority to handle proposal forms.
• He has implied authority to handle proposals as a result of previous dealings.
• He carries out a survey and describes the property on the insurer’s behalf.
• The insurer ratifies an unauthorized act, or has previously done so.
• He has express or implied authority to collect premiums.
• The insurers instruct him to complete the proposal for the insured.
• The authority to issue cover notes.
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Model answer for question 4
Any two of the following:
(a)
The Law Commission was established by Law Commission Act 1965. It is
responsible for consolidation and revision of English law, reviewing English law as a
whole, and for updating and development of the law. For example, currently it is
conducting a wide-ranging review of insurance contract law.
(b)
The House of Lords is the highest UK court and has legislative power as a function of
Parliament. It has appellate jurisdiction only and does not try cases at first instance.
It has jurisdiction in civil and criminal cases. Decisions of the House of Lords bind
all lower courts (but not itself, since 1966). The House of Lords only hears appeals
on a point of law of major public importance and leave for appeal is necessary. (Soon
to be replaced by the Supreme Court).
(c)
The Council of the European Communities has the greatest legislative power of all
European Union institutions. It consists of representatives (usually ministers of
relevant departments) of member states. Each state holds Presidency for six months.
The Council legislates mainly through regulations (which are ‘self-enacting’) and
directives (which require implementation by each member state according to its own
national legislative process).
Model answer for question 5
(a)
Contracts generally will be void and unenforceable if they are illegal or against
public policy and the same is true in the case of insurance contracts. Money paid
(e.g. premiums) or property transferred under an illegal contract cannot usually be
recovered, unless the parties are not in par delictu (equal in wrongdoing) or unless
one party ‘repents’ for their wrongdoing.
(b)
Any three of the following:
• An insurance contract may be illegal and void because the would-be insured lacks
the insurable interest required by statute.
•
The purpose of the contract may be illegal or against public policy. Contracts of
insurance with enemies or on enemy property may fall in this category.
•
If insured property is used unlawfully the contract may be rendered illegal. In
marine insurance law there are decisions which suggest that policies of insurance
on illegal adventures are themselves illegal.
•
In any case where there is a close connection between the loss for which the
insured seeks compensation and a criminal act, the policy may well be
invalidated.
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Model answer for question 6
Any one of the following:
(a)
Overseas Tankship (UK) Ltd v Mort’s Dock and Engineering Co. Ltd (‘The Wagon
Mound’) (1961).
The law attempts to place a reasonable limit on a defendant’s responsibilities by
releasing him from liability where the damage is too remote. Originally the test for
remoteness of damage was based purely on causation: (see The Polemis 1921).
This principle was rejected by the Privy Council in The Wagon Mound (the name of
the ship involved). The case established a new test based on foreseeability: damage
would be too remote if it was of a type which was not reasonably foreseeable.
The Wagon Mound was an Australian case and therefore not strictly binding in
English law. It has, however, been followed in subsequent decisions.
(b)
Until recently there were differences of opinion about the basis and origins of the
principle of subrogation. However, Napier v Hunter (1993) settled this and a number
of connected issues.
The court held that the origins of the doctrine of subrogation lay in equity.
However, it also found that the basic doctrine had been supplemented by the common
law, which implies the following four terms into insurance contracts:
• a duty on the part of the insured to start proceedings against a third party in order
to reduce his loss;
• a promise by the insured to account to the insurer for moneys received from the
third party;
• a promise by the insured to permit the insurer to exercise his right of action
against the third party, should the insured fail to do so himself;
• a promise by the insured to act in good faith when proceeding against the third
party.
Napier also established that in cases where the recovery by way of subrogation is less
than the loss the insurers can keep the whole of it, even though the insured has not
been fully indemnified (for example, because of a policy excess). Arguably, this is
because the insured, in accepting an excess, has ‘agreed’ to bear the first part of any
insured loss himself, giving the insurers first claim on the money that is recovered.
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Model answer for question 7
The Act brought about a fundamental change in the common law in relation to the doctrine
of privity of contract.
The Act provides that a third party (i.e. someone other than one of the original contracting
parties) can enforce a contractual term if:
•
•
the contract provides that they may do so; or
the contract purports to confer a benefit on the third party, unless on a true construction
of the contract it appears that the parties did not intend the term to be enforceable by the
third party.
The third party can only enforce the contractual term if they are expressly identified in the
contract by name, or they belong to a general class of persons identified in the contract (e.g.
‘all purchasers of products’). The third party need not be in existence when the contract is
made.
The Act supplements the existing law and does not remove or replace any of the existing
exceptions to the doctrine of privity.
A number of contracts are specifically excluded from the Act, including bills of exchange,
terms in contracts of employment against an employee, and most terms in contracts for the
carriage of goods by sea (and some other contracts of carriage). Insurance contracts are not
excluded from the Act, but it is possible for the parties to an insurance contract (or any other
contract) to exclude the operation of the Act altogether.
Model answer for question 8
(a)
Vicarious liability is liability that is imposed upon or assumed by one person for a
legal wrong committed by another. Strict liability is liability that can arise even in
the absence of intent or negligence on the part of the defendant.
(b)
The most prominent example of vicarious liability is the liability of the employer for
torts committed by an employee in the course of employment.
Strict liabilities include common law liability under the old rule in Rylands v Fletcher
(1868); liability under the Consumer Protection Act 1987 and contractual liability in
general (unless a person only contracts to take reasonable care). Animals Act.
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Model answer for question 9
Originally, in English law there was no liability in tort for negligent words or advice, only
for negligent acts. Liability for negligent advice arose only where there was a contract
between the parties. This meant that professional people who gave bad advice could be sued
only by their clients – those in a contractual relationship with them. They would not be
liable to other people who suffered loss as a result.
The law was changed by the House of Lords in Hedley Byrne v Heller and Partners (1963).
This case established that liability could arise in tort for negligent misstatement. It
established also a new category of liability in tort for pure economic loss.
White v Jones (1995) case.
Liability under the Hedley Byrne rule arises where:
•
•
•
•
there is a ‘special relationship’ between the parties (but not a contract) where it is
reasonable for the claimant to rely on advice given or the defendant assumes
responsibility for it;
the giver of the advice can reasonably foresee that the advice is likely to be acted upon
and the recipient is likely to suffer if it is inaccurate;
the advice is in fact acted upon or otherwise causes loss to the claimant;
the key element is reliance on the part of the claimant or an assumption of responsibility
towards the claimant on the part of the defendant.
Model answer for question 10
(a)
•
•
•
•
•
(b)
There must be two or more policies of indemnity.
The policies must cover a common interest in the loss: see the case North British
and Mercantile Insurance Co. v London, Liverpool and Globe Insurance Co
(1877). Sometimes known as the ‘King and Queen Granaries’.
The peril causing the loss must be common to each policy: see American Surety
Co. of New York v Wrightson (1910).
The subject matter of the loss must be common to each policy.
There must be liability under each policy for the loss: see Legal and General
Insurance Society v Sphere Drake Insurance Co Ltd (1992).
Since these are liability insurance policies the ratio of contribution should be
calculated according to the independent liabilities method.
The independent liabilities are equal since each insurer would pay the full loss of
£66,000 if its policy were the only one in force. Therefore, the loss should be shared
equally between the insurers: £33,000 each.
Independent liability of Republican Insurance
Independent liability of Crown insurance
Therefore the loss is shared in the ratio of 50:50.
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= £66,000
= £66,000
Model answer for question 11
(a)
In Bank of Nova Scotia v Hellenic Mutual War Risks Association (Bermuda) Ltd (The
Good Luck (1992)) the House of Lords held that a breach of warranty terminated
cover automatically from the date of breach and, to all intents and purposes,
terminated the insurance policy. However, the contract will not end if there is a
waiver of the breach of warranty by estoppel on the part of the insurers. Waiver by
estoppel occurs when the insured has broken a warranty but can prove that the
insurers have clearly indicated, by their words or conduct, that they do not intend to
rely on the breach of warranty as a defence to further liability under the policy.
(b)
The following are examples of waiver by estoppel. Knowing of the breach the
insurers:
• issued or renewed the policy;
• accepted further premiums;
• advised the insured about future loss prevention;
• resisted the claim on grounds other than breach of warranty;
• gave the insured 30 days notice of cancellation under a cancellation clause instead
of treating the contract as having ended automatically.
Model answer for question 12
(a)
Usual authority
An agent may have implied actual authority to perform those acts which are usually
performed by persons in the agent’s position or usual in a particular trade or
profession. This is known as usual authority (or customary authority).
A problem may arise, however, if the usual authority of the agent has been restricted
by the principal, or if the agent abuses his position in some way. In this case the
agent will be acting outside his actual authority, even though he is doing what is
customary. In such cases the principal may still be bound by the apparent authority
of the agent. See Panorama Developments (Guildford) Ltd v Fidelis Furnishing
Fabrics (1971), Watteau v Fenwick (1893).
(b)
Agency by necessity
Agency by necessity arises where a person is entrusted with goods belonging to
another and an emergency makes it necessary to do something to preserve them.
For example, in Great Northern Railway Co. v Swaffield (1874) a railway company,
through no fault of its own, was unable to deliver a horse which had been consigned
by rail and was unable to contact the owner for instructions. The company paid for
the horse to be stabled and was held entitled to recover the costs from the owner,
since the money had been expended on his behalf.
An agency of necessity will arise only in cases where it is impossible to obtain the
owner's instructions in time. Such an agency will therefore occur only rarely now,
with modern communications technology available to most people.
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Model answer for question 13
The issue here is causation: is the original accident the proximate cause of Peter’s death or is
it the MRSA?
In the former case the insurers would be liable but in the latter they would not, as MRSA is
neither ‘visible’ nor ‘violent’.
If we regard MRSA as a natural and probable consequence of hospitalisation then the
insurers would be liable. This argument might well succeed if MRSA was rife in the
hospital, especially if Peter was likely to have died from the accident in any event. However,
one could argue that the main cause of Peter’s death was still the MRSA, a distinct cause
which was not a natural consequence of going into hospital.
For appropriate reference to case law on ‘chains of events’ (Etherington v Lancashire and
Yorkshire Accident Insurance Company (1909), Leyland Shipping v Norwich Union Fire
Insurance Society Ltd (1918), etc).
Model answer for question 14
(a)
In the case of a dispute about the interpretation of a statute, regulation or legal
document (including an insurance policy), the court will assume that the parties
intended the words in question to bear their ordinary grammatical meaning.
The rule will not apply if the words in question were clearly intended to be used in a
specialised or technical way, or were clearly intended to bear their strict legal
meaning as opposed to ordinary meaning.
(b)
For example, in Thompson v Equity Fire Insurance Co. (1910) a fire policy covering
a shop excluded liability for loss or damage occurring ‘while gasoline is stored or
kept in the building insured’. The policyholder did, in fact, have a small quantity of
gasoline which he used for cooking, but the court held that the exclusion did not
apply because the words ‘stored or kept’, in their ordinary meaning, implied storage
in large quantities, for the purpose of trade.
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Model answer for question 15
(a)
In marine insurance there is a long established principle that, where the insured has
been paid for a total loss, the insurer is entitled to claim for his own benefit anything
that remains of the insured subject matter. The action of giving up the subject matter
to the insurer is referred to as abandonment, and the right of the insurer to take over
the subject matter is known as salvage.
Generally, the doctrine of abandonment and salvage supports the principle of
indemnity and prevents the insured from ‘making a profit from his loss’.
In marine insurance salvage and abandonment are particularly important, because
marine insurance recognises not only actual total losses (where the subject matter is
destroyed, or ceases to exist, or the insured is irretrievably deprived of it) but what
are known as a ‘constructive total losses’. This is where the subject matter is not
destroyed but the insured is deprived of the possession of his ship or goods and it is
unlikely that he can recover the ship or goods; or the cost of recovering the ship or
goods would exceed their value when recovered.
Where there is an actual total loss under a marine policy abandonment is automatic.
However, in the case of a constructive total loss the insured must serve a notice of
abandonment on the insurers if he wishes to be paid for a total loss. This is a formal
notice indicating the insured’s willingness to give up the subject matter to the
insurers. It should not be confused with the action of abandonment itself. If no such
notice is served the insured is deemed to have suffered a partial loss and may claim
only for this.
In non-marine insurance the concept of a constructive total loss is not recognised.
Losses are either actual total losses or partial losses and the points made above about
notice of abandonment are therefore not relevant.
However, when insurers pay an (actual) total loss under a non marine policy the
doctrine of abandonment and salvage will apply.
When insurers pay a total loss under a non-marine policy there will often be little of
value remaining, because the property will either be lost, or totally destroyed or
completely useless. Nevertheless, if the insured does not agree to treat the property
as wholly destroyed he cannot insist on the loss being wholly made good to him and
it is clear from cases such as Rankin v Potter (1873) that property insurers are entitled
to any materials left by the fire (or other peril) where they have agreed to pay a loss
in full.
In some cases property is recovered intact after the insurers pay for a total loss. This
is particularly common in the case of theft claims, but may apply in other situations,
such as that in Holmes v Payne (1930), where insurers paid a total loss on jewellery
which was believed to have been destroyed in a fire but was later found undamaged.
In any such case the insured ceases to be the owner and the insurer is entitled to claim
the property.
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Again, in the case of motor claims where vehicles have been ‘written off’ the insurers
are entitled to sell the remains of the insured vehicle to reduce their loss. In practice,
however, insurers often agree to sell the property back to the owner and in some
cases (such as fine art insurance) the policy may contain a clause giving the insured
‘first refusal’. The Insurance Ombudsman has taken the view that the insured should
always be given the chance to repurchase.
(b)
Abandonment is often linked with subrogation and has the same general purpose of
preventing the insured from recovering more than an indemnity. However there are
important differences, as follows:
• subrogation gives the insurer the right to pursue a claim against a third party for
the loss of the subject matter whereas abandonment and salvage confer rights
only over the subject matter itself;
• an action by way of subrogation cannot be brought in the insurer’s own name
(with one exception), whereas an insurer who accepts abandonment becomes the
owner of the goods;
• the insurer can make a profit on the abandoned property, whereas subrogation
allows the insurer to recover no more than his own payment;
• subrogation operates automatically as a result of the principle of indemnity,
whereas abandoned property need not be accepted by the insurer.
Model answer for question 16
In the general law conditions do divide broadly into conditions and warranties – and a breach
of the former will allow the injured party to avoid the contract whereas a breach of the latter
allows only an action for damages.
However, in the general law there are also intermediate (innominate) terms which are neither
conditions nor warranties – in this case the remedy depends upon how serious a breach is in
any particular case.
In insurance, the words ‘condition’ and ‘warranty’ do not have the same meaning as in the
general law of contract. Furthermore, in insurance law the classification of terms is more
complex – it is not true to say that ‘it is simply the other way round’.
A warranty in insurance is not a minor term of the contract but one of great importance. In
this respect it is similar in effect to what is described as a condition in the general law of
contract.
A warranty is essentially a promise made by the insured relating to facts or to something
which he agrees to do. It can relate to past or present facts (i.e. be a promise that something
was so or is so), or it may be a continuing warranty, in which the insured promises that a
state of affairs will continue to exist or he will continue to do something.
However a breach of warranty in insurance will cause cover (and, in effect, the contract) to
terminate automatically rather than give rise to a right to avoid the contract as in the case of a
breach of condition under the general law. Cover will terminate from the date of the breach,
even if the breach did not cause or have any connection with a loss. A term may still be
deemed a warranty even though the word ‘warranty’ or ‘warranted’ is not used in connection
with it.
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Conditions in insurance are not simply the equivalent of warranties in the general law but
divide into different types.
•
A condition precedent to the contract is one which provides that the policy as a whole
will be avoided if the insured fails to comply with the term. The condition may
impose a continuing obligation on the insured. For example, motor policies usually
contain a clause which requires the insured to maintain the vehicle in a roadworthy
condition.
•
If a condition precedent to liability (or recovery) is not observed, the insurers may
avoid liability for a particular loss, but not repudiate the contract as a whole. Claims
conditions, such as those requiring the insured to give notice of a loss, provide an
example of this category.
Although insurers usually draft their policies in such a way that the terms take effect as
warranties or conditions, as described above, some (minor) terms may fall in a different
category, e.g. collateral conditions (or ‘mere’ conditions). These are terms which are not
part of the main agreement to insure, but are concerned only with a side issue, such as the
adjustment of the premium. If a condition of this sort is broken the insurers will not able to
avoid the policy or avoid the claim but, at the most, claim damages. E.g. see Re Bradley and
Essex and Suffolk Accident and Indemnity Society (1912).
All insurance policies carry a number of exceptions – they are usually easy to distinguish.
There are also ‘suspensive conditions’ or ‘clauses describing the risk’. A breach in this case
causes cover to be suspended, but cover will re-attach if and when the breach ceases to take
effect.
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Model answer for question 17
(a)
An adequate summary of the principle of indemnity?
No it is not. First, not all insurance contracts are contracts of indemnity – for
example, life assurance and most personal accident insurances are non-indemnity
contracts.
Second, indemnity is a contractual principle and can be contractually varied. The
insurer and insured can agree that the policy will give either more or less than a full
indemnity.
More than a full indemnity may be provided under a valued policy, a ‘new for old’
cover on household goods and personal possessions or where cover on buildings or
machinery is arranged on a reinstatement basis, which covers the cost of rebuilding
‘as new’.
The policy may provide less than a full indemnity for many reasons: e.g.
under-insurance, average clauses, sums insured or other policy limits, deductibles etc.
(b)
If the insured intends to repair or rebuild the property, and it is reasonable to do so,
the measure of indemnity will normally be based on the cost of the work less an
allowance for depreciation (wear and tear) or betterment. See Reynolds and
Anderson v Phoenix Assurance Co. Ltd (1978).
If the insured does not intend to reinstate, or it is clearly unreasonable to do so, the
measure or indemnity will depend on the circumstances.
In most cases the appropriate basis will be the usual basis described above (cost of
reinstatement less depreciation).
In other cases market value will be appropriate, but the insurers must prove that there
is a market for such buildings unless the insured is actually a willing seller at the time
of the loss (See Leppard v Excess Insurance Co. Ltd (1979)).
In some cases, e.g. where there is no market for the sort of building in question, the
cost of replacing it with a (modern) building of similar size and utility may be
appropriate. See for example Exchange Theatre v Iron Trades Mutual Insurance Co.
Ltd (1983).
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Model answer for question 18
(a)
The two reasons are usually given:
• To reduce moral hazard – for example the risk that a person might insure property
in which he had no interest with a view to damaging or destroying it in order to
collect the insurance money.
• To curb gambling – the presence of insurable interest was traditionally cited as a
key difference between a (legally valid) insurance policy and a (legally
unenforceable) wager.
This distinction has become somewhat blurred now that gaming contracts have
become valid and enforceable in law.
(b)
In England, the interest must also be a legal interest – one that the law recognises and
will support. In Macaura v Northern Assurance Co. Ltd. (1925). Macaura had
insured timber on his estate under a fire policy in his own name. He had already sold
the timber to a company of which he was the only shareholder. When the timber was
destroyed in a fire the insurers refused to meet the claim on the grounds that Macaura
had no insurable interest in the assets of the company. The House of Lords held that
the insured had an interest in his shares, but none in the timber, which was owned by
the company, a separate legal entity. The fact that the insured would clearly suffer an
economic loss as result of the fire, because the value of his shares would go down,
was regarded as insufficient to give him an insurable interest.
In a number of countries where the legal system is based on English law the Macaura
principle has been rejected, abandoned, or never adopted. They include most US
states, Australia and Canada. Generally, in these countries an economic or financial
interest in the subject matter is required, but a legal or equitable interest is not.
(c)
(i)
The Judge. There is probably a valid insurable interest here because, if the
judge were to die during the trial, the case would have to begin again with a
new judge. The effect of this might be added cost for Michael as he would
probably be contractually obliged to pay his lawyers for a greater period of
time. Hence the death of the judge could trigger a legal obligation to pay a
greater sum than would otherwise be due.
(ii)
There is probably a good interest here as it is well established that a creditor
has an insurable interest in the life of his debtor, up to the amount of the debt
and any interest due on it. The fact that Jill disputes the debt should not make
any difference, because the right to sue for the debt clearly has some value,
even if it is not certain that the action will succeed. If Jill dies the chance of
recovering the money will certainly diminish.
(iii)
There is unlikely to be an interest here as we can assume that Michael has no
legal right to the services of the odd-job man and would have no remedy if the
latter refused to work for him. There would probably be an insurable interest
if the odd-job man was an employee as employers do have an insurable
interest in the lives of their employees; however, the nature of the relationship
suggests that there is no contract of employment in force.
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(iv)
There is unlikely to be an insurable interest here. If Christopher dies Michael
would lose the benefit of being looked after by his son in his old age, but sons
generally have no legal obligation to look after their fathers so the interest is
not a legal one. Furthermore, there is no evidence that Christopher has
entered into any legally binding agreement to look after his father.
(v)
This case is similar to the case of Christopher (above) in that Michael would
lose the potential benefit of his Aunt’s gift if she were to die before attaining
the age of 100. However, Florence’s promise to give Michael £100,000 is not
legally binding as the consideration for it (Michael ‘being good’ to his aunt)
seems much too vague to count as valuable consideration. Thus the interest is
not a legal interest as required by English Law. A mere expectancy.
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