Imagine a scenario:
A claims manager, in a Standard Fire and Special Perils Policy, observed during the processing of the claim that the insured didn’t have an insurable interest in the subject matter of the insurance at the material time of the accident. The insured, however, had an insurable interest at the time the insurance commenced. The claim manager had no option but to repudiate this claim. However, he could not cite a policy condition that would allow him to deny the claim. He meticulously examined every condition printed or endorsed on to the Policy. He could find the mention of conditions related to contribution, subrogation, indemnity, average Clause, arbitration clause, misrepresentation, mis-description or non-disclosure of any material particular and fraudulent declaration and means. But he could not find any condition related to insurable interest. He was therefore in a fix on how to deny the claim by citing a proper policy condition.
In this context, it is imperative to understand the word ‘Conditions’. Every insurance contract has terms known as “Conditions” or the terms of the Policy. Any breach of the contractual terms by the assured will allow the underwriters to raise a defence under the Policy for a claim that would otherwise be payable under the Policy. A violation of a condition can prejudice the validity of a liability for a claim(insurance) or the Policy itself.
The terms of the contract are exhaustive provisions contained in the agreement. The terms of a contract must be specific; that is, an essential term should not be missing from the contract, and the meaning of a critical term should not be uncertain or nebulous.
Certain conditions are integral to all insurance contracts. They are called Implied Conditions and are effective even though they don’t appear on the face of a policy. Implied terms express themselves in three ways: In fact, in law and by custom or usage.
‘A term implied in fact’ is not stated expressly but reflects the intentions of the parties. They are so obvious that they go without mentioning. When you visit a restaurant and order a cup of hot coffee, it is evident that you have to pay for the coffee. The implied term lends ‘business efficacy’ to the contract.
‘Terms implied by custom or usage’ can be implied by (the reasonable and consistent) custom and the usage of the market or trade where the contracting parties operate.
‘Terms implied in law’ are terms -the law automatically applies to the agreement. Most medicines are sold by description of their ingredients; there is an implied condition that the medicine will correspond to the description of its ingredients.
There are four implied conditions in an insurance contract. The first implied condition states that the insured must have an insurable interest in the subject matter of insurance. In marine insurance, this insurable interest must exist at the time of the loss. However, this interest must also exist in a fire policy at the time of insurance commencement. The second implied condition states that the subject matter insured must exist at the commencement of the policy. An example could be someone insured 100 goats with an insurance company, but there were only 87 goats at the commencement of the insurance policy. It clearly shows that the subject matter stated for insurance didn’t exist.
The third implied condition states that the subject matter shown in the policy must be adequately described so that it can be identified easily and beyond any doubt. An example could be a person owning multiple shops with the same name on the same floor of a mall, but located in different areas. All these shops must be accurately described, including their proper shop numbers and important landmarks, such as nearby shops, to identify them beyond a reasonable doubt when taking an insurance claim.
The fourth implied condition states that all parties to the insurance contract must abide by the principle of ‘Good Faith’ with one another in negotiations until the contract is concluded and remains in effect.
Express Conditions
The conditions printed or endorsed on the policy are termed Express Conditions. There are three types of Express Conditions: (1) Express conditions that explain the Implied Condition, (2) Express conditions that modify or add to an implied condition. (3) Express conditions that limit the liability of an insurer, endow rights in the insurer and enforce requirements on the insured.
As stated above, express conditions can modify implied conditions. Condition No. 1 of the Standard Fire and the Special Perils policy, which states, ‘THIS POLICY shall be voidable in the event of mis-representation, mis-description or non-disclosure of any material particular’ is an example of such modification. If you consider the implied condition ‘no-3’, you will observe that mis-description may allow the insurer to avoid the policy from the outset. However, once it is made an express condition, the effect of the condition changes. The policy now becomes voidable at the insurer’s option. However, it doesn’t render it voidable as long as the breach is in respect of a material particular. The above modification, therefore, allows the insurer to disregard inconsequential mis-descriptions, misrepresentations, and non-disclosures if it chooses to do so.
We observe another such modification in the Private Car insurance policy. The Condition 8 of Private Car Policy states, ‘The due observance and fulfillment of the terms, conditions and endorsements of this Policy in so far as they relate to anything to be done or complied with by the Insured and the truth of the statements and answers in the said proposal shall be conditions precedent to any liability of the Company to make any payment under this Policy’.
The above express condition significantly modifies the impact of the implied conditions. The policy does not become void ab initio or voidable. Only the affected liability or claim becomes voidable. The policy remains intact, and so do the previous claims and subsequent claims, except for the claim that was affected. Suppose a claim was not reported on time, or proper investigation in the event of theft was delayed by the insured, the insurer may still pay the claim by deducting a certain amount if such delays didn’t significantly affect the outcome of the claim. The above express condition provides significant relief to customers and serves as a good example of customer-centric policy wordings.
Consider a scenario: a private car was used as a commercial vehicle to carry passengers. There was an accident. The limitation to the use had nothing to do with the accident, as per the survey report. The above example is a clear violation of the ‘Limitation to Use’ Clause. This clause is part of the General Exception and categorically states that the company shall not be liable for such loss. Should a claim manager straightaway reject the claim on this count? As noted above, these conditions must be fulfilled by the insured, enabling the insurers to take certain actions.
Clear understanding of terms like Precedent and Subsequent
These terms relate to the timing of an event that brings a contract into operation or bars a claim from being recovered. They relate to both implied and express conditions and fall into three broad categories :
- Condition Precedent to Contract: These conditions, if breached, render the contract void ab initio. In other words, the policy will not take effect if the insured fails to comply with the policy’s terms. For example, if the subject matter of insurance didn’t exist at the time of taking the policy. In simple words, if the terms precedent to contract are not fulfilled, the contract doesn’t come into existence.
- Condition Precedent to Liability: The condition is used to describe a term that allows the insurers to discharge themselves from liability for a particular loss that is affected by the breach. If breached, they don’t void the policy ab initio, but bar the insured from staking a claim or recovering in respect of a claim that is affected by the breach. The policy remains intact. It just affects the claim or the liability that has been breached.
- Condition Subsequent to Contract- These conditions, when breached, don’t render the policy void ab initio. However, the insurer can avoid the policy from the time of breach, provided it occurs during the policy period. It is to be remembered that the policy remains in force till the time of breach. An example is filing a fraudulent claim. The policy can be avoided the moment the fraud is proven.
- Collateral conditions, or ‘mere’ conditions, are not conditions precedent and are considered minor or collateral terms. The breach of such terms allows the insured to claim under an insurance contract. These breaches don’t go to the root of the contract. They are inconsequential breaches, and the insurer should pay such claims.
How do we ascertain whether a term is a condition precedent?
It depends on how the term has been framed. Where the word Condition precedent is written there is no confusion. Similarly if it is mentioned that the insurer will not be liable for the loss if the insured does not comply with the condition’; or the way it is mentioned in the condition 8 of Private Car Policy -‘ The due observance and fulfillment of the terms, conditions and endorsements of this Policy in so far as they relate to anything to be done or complied with by the Insured and the truth of the statements and answers in the said proposal shall be conditions precedent to any liability of the Company to make any payment under this Policy’.
The problem in India is that the conditions and warranties are treated alike. Everything is treated as a breach of condition. A breach of warranty has the same effect as a condition. As a result, remedies for a breach of contract do not benefit Indian customers. There is no scope for collateral or mere conditions. A violation of a mere condition entitles the insurer to reject liability only if the breach of the condition was so severe that it went to the root of the contract.
Certain developments in the UK Act – The Insurance Act 2015 – Part 5 of this Act
Deals with Good Faith and contracting out. The part under the caption “Good faith” under Section 14 mentions
“(1) Any rule of law permitting a party to a contract of insurance to avoid the contract on the ground that the utmost good faith has not been observed by the other party is abolished”.
“(2) Any rule of law to the effect that a contract of insurance is a contract based on the utmost good faith is modified to the extent required by the provisions of this Act and the Consumer Insurance (Disclosure and Representations) Act 2012.
“(3) Accordingly—(a) in section 17 of the Marine Insurance Act 1906 (marine insurance contracts are contracts of the utmost good faith), the words from “, and” to the end are omitted”
For the benefit of readers, I would like to quote Section 17, uberrimæ fidei, under the Marine Act 1906.
“A contract of marine insurance is a contract based upon the utmost good faith, and,if the utmost good faith be not observed by either party, the contract may be avoided by the other party” .
The italic portion is deleted in The Insurance Act 2015 (UK). The Act has modified the effects of condition precedent, particularly regarding pre-contractual misrepresentation.
The question of avoiding a policy because the Utmost Good Faith has not been observed is now abolished. This is a clear indication of how laws are being drafted to make them customer-friendly.
Let us examine the case referred to above as regards the violation of the Limitation Clause from the perspective of UK Law. The Insurance Act 2015 (UK) by Section 11 (2) states ‘If a loss occurs, and the term has not been complied with, the insurer may not rely on the non-compliance to exclude, limit or discharge its liability under the contract for the loss if the insured satisfies subsection (3) which in turn states that if ‘The insured satisfies this subsection if it shows that the non-compliance with the term could not have increased the risk of the loss which actually occurred in the circumstances in which it occurred’. Section 11 has added a ‘Causation Dimension’, ensuring that the breach of a term should have a causal connection with the loss mentioned. Should we not consider such claims in India from this point of view?
Authored By:
Prof (Dr.)Abhijit K. Chattoraj , Chartered Insurer
