An Introduction to Insurance Law

An insurance contract has a premium, in return for the premium, the insurer takes on the risk of loss/damage from an uncertain future event. If this event occurs the insurer is bound to indemnify the insured for the loss/damage. If the event never happens, the insurer keeps the premium. The premiums are collected, and any claims made that afford cover are paid out.

The general law of contract applies to insurance contracts, but over the years it has adopted many principles of its own.


Risk --> In an insurance context “risk” is used to describe the subject matter, such as the property, and the insured perils, such as fire or theft.


Placing a risk --> Through utilising the diagram below we gain a better understanding of placing a risk.

The double line represents the contract between the insured and insurer. Both parties use agents, namely the broker and the underwriting agent.


Broker --> Someone who acts on behalf of the party seeking insurance cover. The broker will search the marketplace for the best policy for the party seeking cover or prepared to take on that risk.


Underwriter --> Someone who will examine and then accept or reject the insurance risk. Making this assessment allows the proper premium to be charged for accepting, or “writing”, the risk.


LLOYDS OF LONDON


Lloyd’s of London is an insurance and reinsurance market. Lloyd’s is not a company but rather a collective society of insurers which brings together investors and customers. Below are some individuals present in Lloyd’s:


Syndicates --> formed by one or more members joining together to provide capital and accept insurance risks.


Managing --> entities with sole responsibility for running syndicates, they can run more than one syndicate.


REGULATION


The sale of both life and most forms of non-life insurance are regulated by the FA under the Financial Services and Markets Act 2000. The Financial Ombudsman Service is affected under the Financial Services and Markets Act 2000.


POLICY COVERAGE


The interpretation of a policy is the subject of many insurance disputes. The wording used in the policy is important and is often the main consideration as to whether an insurer must provide coverage to a policyholder.


As Clyde & Co primarily works for insurer clients, we often defend against claims by policyholders where there are coverage disputes. On the transactional side, we provide advice on policy wording to ensure that the insurer client is not open to unnecessary risks.


POLICY COVERAGE IN ACTION: BUSINESS INTERRUPTION INSURANCE POLICIES

The impact of the coronavirus pandemic resulted in businesses making claims under their Business Interruption Insurance Policies. Due to the sheer volume of those affected, the Financial Conduct Authority commenced test case litigation to clarify the extent to which policy wordings may respond to such claims. Two main clauses are considered below:


THE DISEASE CLAUSE:

" We shall indemnify You in respect of interruption or interference with the Business during the Indemnity Period following any:

i. occurrence of a Notifiable Disease (as defined below) at the Premises or attributable to food or drink supplied from the Premises;

ii. discovery of an organism at the Premises likely to result in the occurrence of a Notifiable Disease;

iii. occurrence of a Notifiable Disease within a radius of 25 miles of the Premises”


On this point, insurers argued that there was no way of saying COVID-19 occurred in an area. Even if there was an occurrence of COVID-19 within a 25-mile radius, the government would have implemented the lockdown regardless.


THE PREVENTION OF ACCESS CLAUSES:


“(7) Government or Local Authority Action

Prevention of access to The Premises due to the actions or advice of a government or local authority due to an emergency which is likely to endanger life or property”

Insurers defined “prevention of access” as being unable to enter the premises. Business owners were still able to go to their premises, they were just unable to have customers on the premises.


SUPREME COURT JUDGMENT


The Supreme Court held as follows:

a. It was sufficient to prove that the interruption was a result of Government action taken in response to cases of disease which included at least one case of COVID-19 within the geographical area covered by the clause.


b. The requirement of "inability to use" was satisfied if the policyholder was unable to use the premises for a discrete part of its business activities, or if it was unable to use a discrete part of its premises for its business activities.


RECOVERY WORK


Another line of insurance work for Clyde & Co includes acting for insurers and their policyholders in subrogated recoveries.


For insurers, the principle of subrogation describes a legal right to pursue a third party that caused an insurance loss to a policyholder. The right of subrogation exists at common law and under statute pursuant to section 79 of the Marine Insurance Act 1906, but is also often expressly provided for in the contract between the insurer and the insured.


The process of subrogation usually starts when an insurer has paid out under a policy and a third party has been identified as having contributed to the loss. The insurer then proceeds against the third party responsible by “stepping into the shoes” of the insured. By doing so, the insurer represents the rights of its insured.



Written by Maddie Donald, Alex Johnson, and Ifeoluwa Ogunsakin (First Year Trainee Solicitors at Clyde & Co).


Sources:


Supreme Court Decision in Covid-19 Business Interruption Test Case : Clyde & Co (clydeco.com)

About Lloyd's - Lloyd's (lloyds.com)

Insurance & Reinsurance : Clyde & Co (clydeco.com)

Global Recoveries : Clyde & Co (clydeco.com)

General Insurers and Insurance Intermediaries | FCA