INSURANCE CONTRACT
BASIC PRINCIPLE OF CONTRACT
FORMATION OF INSURANCE CONTRACT
COVER NOTE
POLICY
INSURANCE CONTRACT
A legally binding agreement, one which the law recognize
and enforce
Insurance contract is legally binding contract to insure
Def of insurance contract: a contract where one party assume
the risk of uncertain event promising to pay to another
money or money’s worth on occurrence of such event
Why we need to ascertain whether a contract is an insurance
contract:
◦ For regulatory purpose
◦ Only a valid insurance contract can be enforced
Insurance contract and contract of
surety
Both contract is almost the same. Contract of surety assure to perform a promise or
liability of 3rf party in case of default
Difference:
- motive – I : business.
S: Friendship, family
- Manner of dealing - I : deal with insured
S : deal with debtor
- Ascertainment of risk – I : speculative
S : contemplated
- Undertaking - I : to pay money or money’s worth on occurrence of
insured event
S : to pay creditor the obligation of the
debtor
PRINCIPLES OF CONTRACT
Insurance contract not defined in FSA
No specific formality how an insurance contract should exist
and how it should look like.
Must follow the basic principle of contract according to
Contract Act 1950 – as long as it does not contravene FSA
4 basic principles of contract
1. Offer and acceptance
Documents detailing the insurance package. Prospectus
(invitation to treat from the insurer)
Documents containing questions on insured’s
Proposal
personal particulars and require him to provide form
info relevant to the insurance cover. Answering
and submitting proposal for is a proposal from
insured
Cover note
Temporary contract usually issued by agent /
insurer before issuance of policy. Indicating
(conditional) acceptance by the insurer
The contract between insured and insurer policy
One party must make an offer to enter into contract and the
other party must accept
There must be communication of offer and acceptance. Once
offer and acceptance communicated, it cannot be revoked.
Prospectus is usually considered as invitation to treat. It invite
insured to make an offer
Offer is made when insured fill in and submit the proposal
form. Insured in offering the risk by giving the details
Insurer may accept, reject or make counter offer
Accept: - issue policy according to the agreed terms
Reject : - refuse to insure
Make counter offer: - qualified acceptance. Insurer agree to insure
but with condition. Usually payment of premium
Effect of counter offer: the 1st offer will not be applicable. The
insured have to decide whether or not to accept the counter
offer.
Canning v Farquhar ( 1886) 16 QBD 727
Proposal for life insurance is ‘accepted’ upon payment of
premium. Before premium paid, insured met with accident
and suffered injuries. Insured informed the insurer and paid
premium. Insurer refused to accept the premium on ground
that there was change in the material fact of the risk. Court
decide that the insurer was not bound to honor the
‘acceptance’ since there was counter offer.
Acceptance can be; formal acceptance, issue policy, accept
premium,
Once there is acceptance, the contract is binding even if
policy yet to be issued or premium paid
Adie & Sons v Insurance Corp Ltd ( 1898) 14 TLR 544
Plf have a fire policy with Yorkshire Insurance. After expiry of policy,
Plf approached Def to take up the insurance on the same terms as
Yorkshire. On 18 Feb, Def sent a letter confirming premium. On 19
Feb, Def sent another letter informing that their main office had
accepted the coverage but policy is yet to be issued. On 20 Feb, Plf
premise burned down. Plf informed Def and paid premium. Def
refused to pay contending that there was no binding contract at time
of fire. Court decided that the letter on 18 Feb confirmed acceptance
2. Parties to contract
Parties must have capacity to enter into contract
Licensed insurer
Sec 2 person licensed under sec 10 to carry on insurance
business
Sec 10 licensed by Minister upon recommendation from
Central Bank
2. Parties to contract
Insured
Sec 11 of Contract Act 1950: sound mind, age of majority and
not disqualified from contracting
Sound mind –
Not disqualified – not a bankrupt
Age of majority – 18 (Age of Majority Act). However para 3 Sch
8 FSA provides
• Minor age <16 but >10 can insure his own life or a life in which he has insurable
interest on (with consent of parents)
• Minor age >16 can insure his own life or a life in which he has insurable interest on (no
need consent of parents)
[Link]
There must be intention to enter into contract
Must be free of coercion, mistake, misrepresentation
Must be consensus ad idem. Agreement of both parties on
the material term in the contract (meeting of mind)
If a contract is entered based on mistake, coercion ect, there
is no consent to enter into contract
The policy reflect the terms agreed upon. If any of the
material terms not written in the policy, the policy can be
ractified
Tay Hean Seng v China Insurance Co ( 1953) MLJ 38
Insurer claimed that the policy did not include liability to pillion
rider. The Insured insist that it include the same, r if it doesn't, it
should be rectified. Court decide that Rectification can only be made
if the document failed to reflect the common intention of the parties.
Since there is no agreement that the policy should include pillion, it
cannot be rectified
4. Consideration
Insured : payment premium
Insurer : Assurance given that they will
compensate
Proposal Form
Proposal forms are used to give the insurance company full particulars of the
risk against which the insurance protection is desired.
This proposal form is the basis of any insurance policy. Any
misrepresentation or non-disclosure of facts would make the insurance null
and void.
The prospectus and details question in the proposal form contain insurer
usual policy
Insured who submit proposal form as it is, is deemed to be asking about
insurer usual policy
Pang Lim v China Insurance Corp Ltd (1975) 2 MLJ 239
appellant bought a comprehensive policy. The policy stated that he will be
covered ‘ the comp usual terms of comprehensive policy’. The policy issued
covered all the usual terms but deleted the extra coverage. The court held that
the deletion was valid since the insured asked and obtain the insurer usual
policy
COVER NOTES
Doc issued by insurer prior to issuance of policy. Indicate
insurer agreement to temporary cover pending formal
acceptance and issuance of policy
Purpose of cover note
insured – immediate cover
insurer – time to consider and decide whether to accept
It is a valid contract
Makie v European Assurance Society (1869) 21 LT 102
Makie had a fire policy. He then changed the nature of his business and informed his
insurer. The insurer issued a cover note valid for a month. A fire then destroyed his
premise and insurer refused to pay claiming that there was no policy issued. The court
held that there was a valid contract of insurance by virtue of that cover note
Contain min detail of the policy
Incorporation clause – a clause which state that the terms in the
insurer usual policy will be applicable to the cover note
There is no need to put all the terms in the cover note since it
already have the inclusion clause. Insured will receive the same
coverage as the actual policy
e/though the insured did not know the term in the policy, it was
assume that he accept the term
Chop Eng Tye v Malaysia National Insurance (1977) 1 MLJ 161
Plf bought a fire policy and he was issued a cover note. 4 days later fire destroyed his
business. Def refused to pay saying that the policy stated that the right to claim was
waived if claim made 12 month after the loss. It was held that a/though the term was
not in the cover note, the incorporation clause will incorporate the terms of the policy in
the cover note. As such, the Def was not liable to pay.
There is no responsibility on the insurer to show the
incorporation clause or the policy terms.
If there is no incorporation clause, then the terms which
would normally applicable for the policy will apply
Duration of cover note will be stated in it
Cover note will cease to be valid if:
- duration end but no policy issued
- policy issued within the duration
POLICY
If an insurer agrees to provide insurance they will normally issue an
insurance policy.
Policy contains important information about the insurance contract,
such as the details of the insured person or parties, the period of
insurance, the type or class of risk insured, the premium, the excess,
any additional risks covered by the insurance policy and special
conditions applying to that consumer or that policy, and any specific
risks excluded by the policy.
It also containing the terms and conditions of the policy and more
specific information about what is covered and not covered by the
insurance contract. The policy wording will also outline how
policyholders can make a claim under the contract and their rights
and responsibilities in respect to claims.
COMMENCEMENT OF COVERAGE
Normally will start when there is acceptance
Commencement can be delayed in:
◦ Life insurance – general insurer cannot assume risk until premium paid
◦ Expressly stated in the policy – eg future commencement date
Borhanuddin Hj Jantara v American International Assurance (1987) 1 MLJ 22
An a/stewardess bought a life policy which state that the policy will commence upon
payment of premium and policy issued. She paid 118 but policy yet to be issued.
she died but insurer refused to pay saying that no policy. Court held that the
payment of premium would commence the policy, it was the duty of the insurer to
issue policy
COOLING OFF PERIOD
A period which allow insured to cancel policy
Only applicable to long term policy such as life policy
Para 2 sch 8 FSA – if insured cancel policy within 15 days (or
any longer period specifically mentioned by Bank Negara), the
premium will be returned in full
Upon return of the premium, the policy will be deemed as
cancelled
Para 12 sch 8 FSA – the premium must be returned directly to
the insured. (it cannot be passed to the agent)
