IF3 Chapter Breakdown (approx.) Material Facts 6 questions 8% Ch. 2 Underwriting Procedures 13 questions 17% Ch. 3 Insurance Policies 11 questions 15% Ch. 4 Renewals and Cancellations 3 questions 4% Ch. 5 Insurance Products: Personal Ch. 6 Insurance Products: Commercial Ch. 7 Related Services 2 questions 3% Ch. 8 Underwriting Considerations 12 questions 16% Ch. 9 Establish the Price: Rating 14% Ch. 10 Pricing Factors 5 questions 7% Ch. 11 Managing Exposure 6 question

Material Facts / Circumstances Chapter 1 Material Facts / Circumstances 6 questions = 8% of the exam

Learning Objectives: After studying this chapter, you should be able to: Explain the principles of Utmost Good Faith. Define material information and circumstances and give examples. Explain the principles of the duty of Fair Presentation. Explain the consequences of Non-disclosure and Misrepresentation. Explain Perils and Hazards Explain Moral and Physical hazards Explain the methods of gathering Material Facts

Principles of Utmost Good Faith A contract is a legally binding agreement that requires three elements: Offer Acceptance Consideration What is Caveat emptor ??? Why would this be considered to be unfair in an insurance contract ???

Principles of Utmost Good Faith What is Uberrima Fides ? “A positive duty to voluntarily disclose, accurately and fully all the facts material to the risk being proposed, whether material or not” Who does this apply to? Insured only Insurer only Both insured and Insurer

What is a Material Fact? “Any circumstance which would influence the judgement of a prudent insurer in fixing the premium or determining whether to take the risk” Do consumers need to volunteer material facts ??? Do commercial customers need to volunteer material facts ???

Insurance Act 2015:Examples of material information Special or unusual facts relating to the risk Particular concerns leading to the request for insurance Anything that someone dealing with the class of insurance would generally understand that should be dealt with as part of a fair representation of risks Insurance Act 2015:Examples of material information

Facts that do not need to be disclosed Law Public knowledge Lessen the risk Insurer waived their rights Survey should have revealed Insured doesn’t know Policy terms Spent convictions

Consumer Insurance (Disclosure and Representations) Act 2012 Abolishes insured’s duty to volunteer information Insurer must ask specific questions Insured must take reasonable care not to make a misrepresentation to insurers Does not affect commercial insurances

Consumer Insurance (Disclosure and Representations) Act 2012 Example of considerations Type of consumer contract and target market Relevant explanatory materials How clear and specific were the insurer’s questions? How clear was the warning from insurers at renewal? Who was the agent acting for?

Consumer Insurance (Disclosure and Representations) Act 2012 Agent of insurer when: Collecting information under their express authority Entering into the contract as the agent of the insurer Acting as an appointed representative of the insurer (Parsons. C, 2016, p.9/8)

Advice under the 2012 Act Agent of insurer Agent of consumer Places insurance with only one insurer (for the type of insurance) Under contract to place insurance with restricted number of insurers Insurer places the type of insurance with a restricted number of agents Agent permitted to use insurer name when providing their agent services Insurance is marketed under the name of the agent Insurer asks the agent to solicit the consumer’s custom Giving impartial advice to the consumer Conducts a fair analysis of the market When consumer pays the agent a fee (Parsons. C, 2016, p.9/9)

Advice under the 2012 Act Agent of insurer Agent of consumer Places insurance with only one insurer (for the type of insurance) Under contract to place insurance with restricted number of insurers Insurer places the type of insurance with a restricted number of agents Agent permitted to use insurer name when providing their agent services Insurance is marketed under the name of the agent Insurer asks the agent to solicit the consumer’s custom Giving impartial advice to the consumer Conducts a fair analysis of the market When consumer pays the agent a fee (Parsons. C, 2016, p.9/9)

Insurance Act 2015 Confirms these common law rules Statements must be substantially correct Statements of expectation or belief must be made in good faith Not material if misrepresentation would have made no difference to outcome Representation may be withdrawn or amended before contract is formed Must disclose material facts you know or ought to know Repeals Sections 18, 19 and 20 of Marine Insurance Act 1906 Replaces duty of ‘Utmost Good Faith’ as set out in these sections with a duty of ‘Fair Representation’ Fair representation Duty to disclose and a duty not to misrepresent material facts

Insurance Act 2015 continued No need to disclose facts which: Diminish the risk The insurer knows The insurer ought to know The insurer is presumed to know Have been waived by the insurer Materiality test unchanged but Act gives extra guidance: Special or unusual facts relating to the risk Particular concerns which led to the insured seeking the cover Anything that people concerned with the class of insurance or field of activity would regard to be something that should be included in a ‘fair representation’

Duty of Disclosure What does the Duty of Disclosure relate to ??? Q: Under common law when does the duty of disclosure apply Inception only  Renewal only  Inception and renewal  Through out the policy  Policy condition…

Duration of the Duty of Disclosure Policy Condition Rules Common Law Rules There is a need for the customer to be honest during the negotiation stage, at any mid term adjustments and again at the renewal stage. Policy Condition Rules Insurers write a condition into the policy which means the customer must now advise the insurer of any material changes. This is referred to as the continuing requirement.

Consequences of Non Disclosure Consumers – CIDRA 2012: If the consumer took reasonable care not to breach their duty or If the breach did not induce the insurer to take on the risk, they have no remedy. If the above is not the case, then the breach is classed as “qualifying” and the insurer has two remedies: If deliberate or reckless they can void the policy If it was careless the insurer has two options: Alter their terms and deal with the risk as though there was no breach OR Proportionately reduce the amount paid, if they would have charged a higher premium.

Consequences of Non Disclosure Commercial customers – Insurance Act 2015: If the insured is in breach of the duty of disclosure, the insurer may avoid the policy ab-initio For both commercial and consumers If non-disclosure or misrepresentation is fraudulent then: The policy is voidable. The insurer can keep the premium and sue for damages. They can however ignore the breach of good faith, in which case the policy continues and the claim must be paid.

Physical and Moral Hazards What are hazards ???

Obtaining Material Facts The most common way of gathering material facts is… Brokers Risk Surveys Supplementary questionnaires Meeting with clients Call Centres Internet

When a new policy is taken out, under common law, when does the duty of disclosure end? When the insured has full details of the risk. When negotiations begin. When the premium is paid. When the contract is formed.

When does the duty of disclosure start and end under common law? Starts when negotiation begins and is an ongoing warranty under the policy wording. Starts at policy issue stage and ends when policy comes up for renewal. Starts when negotiation begins and ends when the contract is formed at inception. Starts at renewal of the policy and ends when the premium is paid.  

In relation to a commercial combined insurance contract which of the following is not a physical hazard? The type of products manufactured. Intruder alarm security precautions. Poor factory management. The standard of the building construction.

Under the Consumer Insurance (Disclosure and Representations) Act 2012, in which of the following scenarios is an agent deemed to be working on behalf of the proposer? They collect information from the consumer, if the insurer gave them express authority to do so. They disclose information to insurers provided to them by the insured. They act as the appointed representative of the insurer. They enter into the contract as the insurer’s agent, if the insurer gave them express authority to do so.

With regard to the duty of disclosure, what core change was made by the introduction of the Consumer Insurance (Disclosure and Representations) Act 2012? It abolished the duty of businesses to volunteer material facts to insurers. It abolished the duty on Brokers to disclose material facts to consumers. It abolished the duty on insurers to disclose material facts to consumers. It abolished the duty on consumers to volunteer material facts to insurers.

Some factors do not need to be disclosed when obtaining a quotation for insurance. Sam is obtaining a quote for theft insurance. What does he NOT need to disclose to his prospective insurers? Target stock. His existing alarm system. His conviction for arson last year. Claims experience.