Insurance tends to be regarded by most people as a "set and forget" form of contract. You submit your proposal, it is accepted by the underwriter and cover "incepts", as insurers and insurance brokers like to say. In the great majority of cases, the policies will sleep peacefully in their drawers for the duration, troubled neither by claims nor changes in risk. So does that mean that once you have bought a policy you need never look at it again? Well, not quite; some care and feeding of insurance contracts, or operational maintenance if you prefer, is still required.
This article provides a mere overview of the most commonly appearing insurance contract terms, understanding of and compliance with which are important for the maintenance of effective cover over the life of the policy – its period of insurance.
Change of Risk and Notification Terms
It is standard practice in many classes of insurance for the policy to contain an express term, commonly referred to as a change of risk clause, which requires the insured to inform the insurer of any substantial alteration in the subject matter of the insurance. "Substantial", in this context, means any change that increases either the likelihood or the potential magnitude of loss.
In failing to notify the insurer of a material change in risk, the insured may breach a term of the contract. Where the change involves an already covered risk and is not likely to cause or contribute to a claim, the insurer's remedy is limited to the monetary value of the prejudice it can prove it suffered as a result. That usually will mean only that the insurer can deduct from the settlement amount whatever extra premium or excess it can show that it would have charged. In some situations though the insurer may be able to reject a claim such as, for example, if it can prove that it would have cancelled the policy had it been informed of the change in risk.
If, however, some or all of the loss is outside the scope of cover because the policy does not extend to it, and the insured could have expanded the cover to encompass it but neglected to do so, or if the change takes the subject of the insurance outside the class of risks to which the policy responds, the insurer can simply decline the claim. Moreover, even in the case of a risk which is still within cover, a change which increases the likelihood or size of potential claims may also entitle the insurer to reject them, and the insured will only recover as much of the loss as it can prove would have happened anyway.
Reasonable Precautions to Avoid Loss
Another common feature of both Property and Liability insurance is a term that the insured must take all reasonable care and precautions to avoid or minimise losses, and mitigate them if they do occur.
Such provisions do not mean that the insured must take all necessary measures to avoid a covered claim. If that interpretation were feasible and enforceable what would be the point of the insurance? What is required in practical terms is that the insured conduct themselves and manage their affairs with a reasonable degree of prudence and care, so as to avoid or reduce foreseeable risk.
However it is worded, a policy condition that purports to require that the insured take all reasonable precautions to avoid loss will not be breached by mere negligence. What is required is a substantially higher degree of culpability, essentially deliberate courting or reckless disregard of an apprehended or obvious hazard, that is capable of amelioration by means that are within the insured's power and which it is reasonable to expect of them.
Assuming there was, in fact, breach of such a policy term, the insured may still be able to claim on the policy if they can prove on the balance of probabilities that even if they had taken all reasonable precautions, the loss, or some portion of it, would still have occurred.
Instalment Contracts of Insurance
If you have entered into an annually-renewable insurance contract, the premium for which is payable in monthly instalments, then obviously the primary obligation which you must discharge in order to maintain it is that of keeping up the payments. The equally obvious question that arises is, what happens if you don't? Does the policy simply lapse at the end of the month or must the insurer take some positive steps to terminate it?
An Insurer can cancel an instalment contract of insurance for non-payment, where:
- the policy contains an express provision for a right of cancellation and the insurer clearly informed the insured of this provision in writing, before entry into the contract;
- the premium instalment has remained due and outstanding for at least a month; and
- proper and explicit notice of the cancellation was given.
An insurer cannot refuse to pay a claim under an instalment policy because of non-payment of premium, again unless there was an explicit, pre-contractual notice to that effect, and at least one instalment of premium is more than 14 days overdue.
Key takeaways for policyholders
Operational maintenance of insurance contracts is a necessary and important exercise. Policyholders who set and forget may find themselves left with unsuitable, insufficient or no coverage.
At a minimum, policyholders should consider whether:
- there have been any substantial changes to the subject matter of the insurance;
- they are taking reasonable precautions to avoid / mitigate loss; and
- premium payments are up-to-date.