Module 5: The Need for Documentation

After studying this module, you should be

able to:

-Describe the content and structure of the policy

- Understand the difference between a cover

note and a certificate of insurance

- Understand the importance of renewal

invitations

Principles and Practices of Insurance

Introduction

A contract does not have to be in writing to be a valid contract. However,

in a complex matter such as insurance, it is advisable to have the details

in writing. There is clearly an opportunity for disagreement if changes

are not confirmed in writing. Documents serve several purposes

including:

•

Information: Standard documents are used, which help insurers

receive information in a consistent manner. This reduces the possibility

of receiving irrelevant data or missing important information.

•

Record Keeping: Insurers need to know their potential liabilities,

reinsurance requirements etc.

•

Discrepancies: The documents clarify discussions and agreements

and ensure that insurers satisfy the policyholder’s requirements

•

Disputes: Reference to the appropriate document can often resolve

disputes at an early stage.

The result is a range of documents for different purposes, which we

shall examine in this final module. Several will be familiar as they were

discussed in earlier modules. Others will be new to you.

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5.1 - Proposal Forms and policy structure

Proposal Forms

The proposal form is the most convenient way for the insurer to receive

information concerning the proposed risk. Proposal forms can be

quite plain or can be a form of advertising, particularly for personal

business.

See Module 3: Risk Underwriting; Section 3.3 for more detailed

information on the Proposal forms.

A brochure helps to sell the product and the proposal when completed

is detached and sent to the company. The policyholder retains the

brochure for information purposes. Brochures may contain a note that

the brochure is not part of the contract and is ‘for information only’.

It is however advertising and like all advertising, it cannot mislead or

misinform the client.

You will recall from module 3.3 that marine insurance and sometimes

large and complex fire risks do not use proposal forms. Briefly, explain

the reasons for this.

Policy Forms

When the insurer has accepted the proposal, terms agreed, the

premium paid (or the insured has promised to pay the premium) then

the contract is in force and subject to the laws of contract, irrespective

of the existence of a policy wording. The policy is the evidence of the

contract, not the actual contract.

Every insurer has their own style of wording for the different classes

of business they write. The approach and presentation may be decided

by company policy, some are simple A4 format, others particularly for

personal lines use a small booklet, bound in plastic covers or try to

make them ‘user friendly’ with explanatory notes and glossy pictures.

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Principles and Practices of Insurance

The class of business determines the length of the document. A

simple PA policy may be just a few pages but a house insurance with its

numerous sections or a fire and perils policy for a large manufacturing

risk, with extra perils, warranties etc could be quite a bulky document

of several pages.

In the UK, the Plain English Campaign has had a major influence on

insurers’ approach to policy wording. It has made them consider the

structure, layout and language used and many policies try to use clear,

everyday language and define any words that may be unfamiliar or

capable of misinterpretation.

Whilst we have stated that every insurer has their individual style, all

policies contain eight sections. They are:

Heading:

The section at the top of the policy giving the insurer’s name, possibly

the company logo and the registered address.

Preamble:

Usually found immediately below the heading (which means a preliminary

statement or introduction).

The preamble contains two essential points:

•

The proposal is the basis of the contract and the proposal form

incorporated in the contract. The proposal is not confined to just the

proposal form. Other documents, correspondence, discussions etc

are part of the proposal and therefore, part of the contract.

•

Reference to the consideration of the insured (has paid or agreed to

pay the premium) and the consideration of the insurer (will provide

the insurance as detailed).

Operative Clause:

An important section of the policy as it sets out precisely the cover

provided by insurers and the circumstances when they will pay.

They often start with the phrase ‘The Company will pay’ and then the

details follow. The Operative Clause can be very short, (certain All Risks

Policies) or quite lengthy (a motor policy).

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Principles and Practices of Insurance

Why is the Operative Clause on an All Risks Policy much shorter than

that of a named perils policy?

Exclusions:

Also known as exceptions they detail what the policy does not cover.

Exclusions can be classified into one of three categories:

•

Risks considered uninsurable in the normal insurance market. Sonic

bangs, radioactive contamination and war (on land) risks are three

that are most common.

•

To avoid confusion certain risks are more appropriately insured under

another policy. The theft policy may exclude money; the PL policy

excludes liability arising from the use of motor vehicles and so on.

•

There are risks that insurers are prepared to consider but because

they are extra hazardous, only after making further enquiries and

possibly requesting additional premium and/or other terms.

Give an example of two exclusions:

The first - because the cover is available under another policy

The second - where the risk is insurable but excluded because it is an

additional hazard for insurers

Conditions:

All insurance policies are subject to conditions - either Implied i.e. not

written in the policy or Express i.e. they are written in the policy. They

lay down rules that govern the behaviour of both parties during the

currency of the policy.

Implied conditions are present for all policies and they are:

•

That the subject matter of the insurance (property etc) actually exists

and is identifiable

•

That both parties have observed utmost good faith

•

That the insured has insurable interest

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Principles and Practices of Insurance

Written into and part of the wording are the express conditions. They

vary according to the type of contract but several are common to most

policies. Conditions can be general, which means they apply to the

whole contract. These include:

•

Alterations

•

Cancellation

•

Claims Notification

•

Fraud

•

Reasonable Care

•

Subrogation

•

Contribution

•

Arbitration

If general conditions apply to the entire contract then particular

conditions are conditions that relate to a particular or an individual

section of the policy and not the entire contract.

Conditions vary according to the time they operate for example, some

relate only to after a claim has occurred. There are three headings:

•

Conditions before the contract These are mainly the implied

conditions but may also be written into the wording. They operate

before the contract is formed.

•

Conditions after the contract These operate after the contract is

in force and are the majority of the conditions. They include taking

proper care, fraud, cancellation, alterations etc.

•

Conditions before liability These conditions apply after a claim

and if the claim is to be paid must not be broken. Subrogation,

contribution (other insurances), claim notification are examples.

COOPERATIVE PROFIT SHARING CLAUSE:

Ten Percent (10%) of said Net Surplus shall be distributed to all

Policyholders, each proportionately to his premium, by reducing the

premium of the following year.

Signature:

The policy is signed by a senior official of the company, typically the

managing director or general manager. The signature is printed on the

policy and usually countersigned or initialled by the official checking the

contents before forwarding to the client.

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Principles and Practices of Insurance

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

5.2 - Warranties and endorsements

Warranties

See Module 3: Risk Underwriting; Section 3.2 for more detailed

information on Warranties.

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

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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 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 were unconnected to the loss.

Endorsements

During the currency of a policy, changes are inevitable, the insured may

change his motor vehicle, property owners buy and sell properties, values

change, and items added to the schedule with others deleted. Insurers prepare

an endorsement detailing the changes made to the terms of the insurance.

Typical of an endorsement is a change of vehicle under a motor policy.

The insured advises insurers who if they are prepared to accept the change

will advise the insured of any extra terms or conditions they may wish to

impose. (It may be a vehicle with much higher value or performance). If

the insured agrees to the new terms then an endorsement will make the

change to the policy. The endorsement will note details of the new vehicles,

any extra terms (higher excess) or additional premium that may be due.

5.3 - Cover Notes and Certificates of Insurance

Cover Notes

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 property is security 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.

The cover note simply states that insurance is in force and gives brief details

of the cover. The notes are temporary and not needed once the policy is

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Principles and Practices of Insurance

issued. The cover note may be a pre-printed form often in a numbered

book or 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

Certificates of insurance serve a very similar purpose as cover notes;

they confirm that cover is in force. When insurance is compulsory, the

authorities may ask the insured to confirm that cover is in force.

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 recognisable 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 and

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.

1. Rashid in Riyadh agrees to purchase machine parts from a company

based in Manchester, UK.

2. Rashid visits his bank in Riyadh and obtains a letter of credit.

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Principles and Practices of Insurance

3. The letter of credit is sent to the supplier’s bank in the UK.

4. 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.

5. The UK supplier receives his money.

6. The UK bank sends the shipping documents to Riyadh.

7. The goods are in transit between UK and Riyadh

8. The goods arrive.

9. To collect his goods Rashid needs the shipping documents, to collect

these he needs to pay the bank in Riyadh.

10.Sothesuppliergetshismoneyfromthebank,thebankcollectsthemoney

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) 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?

5. 4 - Claim Forms

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 this within a reasonable time.

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Principles and Practices of 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.

On receipt of a claim form the claims official 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 issue, further enquiries may be necessary.

Some claims dispense with the need for a claim form. Large losses

where loss adjusters are carrying out a detailed investigation make a

claim form unnecessary.

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 it occurred during the period of insurance

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

What action would you recommend if the information on the

underwriting file contradicts the information on the claim form?

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Principles and Practices of Insurance

5.5 - Renewal Invitations

The majority of policies run for 12 months. There is no obligation on

either side to renew but insurers are keen to keep good business and

want the insured to renew the contract for a further 12 months.

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 insurer’s interests if they wish to retain 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 at 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?

Days of Grace

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 their intention to renew. The renewal notice may

have been lost, the insured on holiday when it arrived, the cheque for

payment may be mislaid. To allow for this insurers may allow a period

of time, (7 to 14 days is typical but could be 30 days) known as days

of grace during which if the premium is paid the policy will continue

without any break in cover.

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Days of grace do not apply if the insured indicates that it is not their

intention to renew. Neither are they on extension of cover.

The Finance Director of a company returns from vacation on 5th

September and discovers the renewal notice for the company’s public

liability on his desk. The renewal date was 1st September and he

immediately prepares a cheque 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 3rd September

two days before the premium was paid. Do you think insurers will deal

with claim? Give reasons for your answer.

Insurers do not have to accept the offer and if they revise the terms

and conditions of the insurance, this becomes a counter offer and the

insured does not have to accept the new terms. It helps insurers to retain

business especially on a large commercial contract where the expenses

of surveying and policy preparation are 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 and the agreement is simply that insurers have an opportunity

to retain business while their terms remain unchanged.

Long-Term Agreements

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 discount from

the premium (5% or even 10%).

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Progress Check

Directions: Choose the best answer to each question.

1. Why do insurance companies use proposal forms?

a. To determine the deductable

b. To calculate the premium

c. To get the material facts

d. To put the conditions

2. What information is in the preamble?

a. The exclusions

b. The coverage

c. Proposal; is basis of contract

d. The warranties

3. What information is in the operative clause?

a. The exclusions

b. The coverage

c. Proposal; is basis of contract

d. The warranties

4. Why do insurance policies need conditions?

a. To set the rules for insured and insurance company

b. To control bad moral hazard

c. To keep good aspects of risk

d. To control morale hazards

5. Generally what is more serious?

a. breach of warranty

b. breach of condition

c. both are correct

d. both are wrong

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Principles and Practices of Insurance

6. When do insurers use endorsements?

a. If there is a physical hazard

b. To control moral hazard

c. To eliminate morale hazard

d. If there is any change in the policy

7. Why do insurers issue renewal notices?

a. To maintain policyholders

b. To get new policyholders

c. If there is any change in the policy

d. Evidence for cover

8. Days of grace.

a. A period with no cover

b. There is cover although premium is not paid

c. There is intent to renew and coverage but premium is not received

d. Is obligatory for an insurance company to give to all policy holders

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