Tutorial 4

1.
a) In order to form a valid insurance contract, several requirements or elements of a
contract must be fulfilled. Discuss how each of these requirements is fulfilled when an
applicant applies for a motor insurance policy. (Rejda, 12 Ed, C9, Q6(b))
1. Offer and Acceptance

An offer is an expression of willingness to contract on specified terms, made with the

intention that it is binding once accepted by the person to whom it is addressed.

Acceptance is defined as when the person to whom the proposal is made signifies his
assent thereto, the proposal said to be accepted. A proposal, when accepted, becomes
a promise.

For Example,The applicant is the offeror that made an offer to the insurer to buy motor
insurance. The insurer has the right to accept or reject the offer of the applicant
depending on the condition of the vehicle.

2. Meeting of minds

Meeting of minds is a common law concept that requires both parties, entering into a
contract, to have a common intention to accept and comply with the terms outlined in the
contract

For example, the applicant is responsible to disclose all information about personal, and
vehicle that is required in the application form. The insurer will only consider the risks
within their acceptable limits.

3. Consideration

Consideration is regarded as a bargain between the contracting parties that is the price
paid by one party for the promise or act of the other party.

For example, consideration in motor insurance is the premium that has been agreed by
both parties upon in advance. The applicant pays the premium of motor insurance
annually.
+intention to create legal relations

4. Legal capacity to Contract

Legal capacity to contract means a party has the legal ability to enter into a contract.

For example, the applicant must absolutely sound mind and reached the age of majority
 which is 18 years old based on the contract law of Malaysia.

5. Legality of the contract

The legality of the contract between parties is a legal agreement where obligations are
mutually agreed upon and that the law can enforce.

For example, the applicant must have an insurable interest on the subject matter to be
insured. This is because the legality of the contract is seen in the principle of insurable
interest.

b) Why is it important to know in an insurance transaction who makes the offer and who
accepts the offer? Discuss.
This is because it affect not only the validity of the contract but the time when it goes into
effect.
When applying for insurance, the first thing you do is get the proposal form of a particular
insurance company. After filling in the requested details, you send the form to the company, but
sometimes with a premium check. This is your offer.
If the insurance company agrees to insure you, this is called as acceptance. In some cases,
your insurer may agree to accept your offer after making some changes to your proposed terms.

It affects not only the validity of the contract but the time when it goes into effect.

c) In a property insurance transaction, who normally accepts the offer? Discuss. (Riegel,
Miller & Williams, C3, Q2)

In property & liability insurance, it is the insured who technically makes an offer to the insurer,
who accepts the offer, rejects it, or makes a counteroffer. The offer is usually accepted by an
insurance agent on behalf of the insurer.

2. In your opinion, which of the following are insurance contracts? Explain your answer.
a) A promise to replace a washing machine if it does not work properly, accidental
damage being excluded.

This is not an insurance contract. Warranties are not considered insurance, if they exclude
losses by external accidental causes.
b) A promise to replace tires that blow out because of defects or accidental causes.

This is an insurance contract. A tire manufacturer was held to be engaged in the insurance
business when it promised to replace tires if any defects were accidental losses incurred within
a stated period.

c) A promise to pay the loss sustained if a share of common stock is worth less five
years from now.
This is not an insurance contract. Investment is a speculative risk but not the pure risk and is not
insurable.

3.
a) Must the beneficiary of a life insurance policy have an insurable interest in the
continued life of the person insured? Discuss.

The beneficiary of a life insurance policy do not need to have insurable interest in the continued
life of the person insured. The insurable interest should occur at inception of life policy.

The beneficiary is not required to have an insurable interest in the continued life of the
person insured.

b) Naylor is an only son and expects to inherit RM50,000 of real estate that his father
owns upon his death of the latter. Has Naylor an insurable interest in the property?
Discuss.

Naylor does not have insurable interest in real estate. It is because before the death of the father,
Naylor did not have the ownership of the real estate. Therefore, the damage of the real estate
would not cause direct losses to him.

In general, a mere expectation is not sufficient to create an insurable interest. It is generally said
that a son who expects to inherit his father’s property under a will has no insurable interest. But
it is difficult to say how far the recognition of economic interests that are not legally enforceable
may be carried by courts & therefore borderline cases will arise under this category.

c) Smith leaves his overcoat at the Elite Tailors to be dry-cleaned. Have the Elite Tailors
an insurable interest in the coat? Discuss.

There is insurable interest for Elite Tailors in the coat because Elite Tailor has legal liability on
clients’ clothes and the failure of the entity to meet the responsibility and make omission leaves
it
open to lawsuit for any resulting damages or a court order to perform because it breaches of
contract.
Yes. If an individual has responsibility for the safety of a property, he is legally liable in case of
damage & has an insurable interest.

4.
a) Indicate the correct and incorrect statements among the following:
i) Insurable interest must exist at the time of the loss.
This statement is correct. If it is general insurance, because in the industry guidelines for some
policy contracts allow the insured a maximum period of 60 days

Correct for property & liability insurance contracts only.

For property & liability insurance contracts, it is sufficient if an insurable interest exists at the
time of the loss, even though no such insurance existed at the time the policy was issued.

However, unlike the situation in property insurance, in life insurance an insurable interest need
exist only when the policy is taken out; its subsequent loss does not void the contract.

ii) For a loss to be collected, insurable interest must exist at the time the insurance is
obtained.
Ans: This statement is correct. It is because in insurance law, we can only buy insurance for
something or someone in which we have an insurable interest. After buying insurance, we can
claim for some compensation when something bad happens.

Correct for life insurance contracts only.

For property & liability insurance contracts, it is sufficient if an insurable interest exists at the
time of the loss, even though no such insurance existed at the time the policy was issued.

However, unlike the situation in property insurance, in life insurance an insurable interest need
exist only when the policy is taken out; its subsequent loss does not void the contract.

iii) Insurable interest arises only out of legal or equitable title.

Ans: This statement is incorrect. Insurable interest will arise when we take out an insurance
policy protecting property, an item or person to mitigate the risk of loss. The risks that we are
trying to avoid are personal risk, property risk and liability risk.

Incorrect. For property & liability insurance contracts, there are various kinds of insurable
interest, and not limited to ownership only:

1) Ownership: The clearest & most common case of the existence of an insurable interest is
that of an owner of property. The owner has an insurable interest, whether he be the legal or the
equitable owner.

2) Creditors: Secured creditors have an insurable interest. E.g. A commercial bank or

Mortgage Company that lends money to buy a house has an insurable interest in the property.
The property serves as collateral for the mortgage, so if the building is damaged, the collateral
behind the loan is impaired. However, the courts have ruled that unsecured or general creditors
normally do not have an insurable interest in the debtor’s property.

3) One who is legally liable: Potential legal liability can also support an insurable interest. E.g.
A dry-cleaning firm has an insurable interest in the property of the customers. The firm may be
legally liable for damage to the customers’ goods caused by the firm’s negligence.

4) Interest arising from contract: A contractual right can support an insurance interest. E.g. A
business firm that contracts to purchase goods from abroad on the condition 3 that they arrive
safely in the U.S. as an insurable interest in the goods because of the loss of profits if the
merchandise does not arrive

b) Must the beneficiary of a life insurance policy have an insurable interest in the
continued life of the person insured? Discuss.
Beneficiary of the policy does not require an insurable interest on the continiued life of the
person insured. In order to purchase a policy, insurable interest not required to exist. In the case
of a life insurance policy, the owner of the policy do not have an insurable interest in the life of
the insured. Insurable interest means an individual receives a financial or other type of benefit
from the continued existence of the person insured.

The beneficiary is not required to have an insurable interest in the continued life of the person
insured
.
5. Nicole is applying for a health insurance policy. She has a chronic liver ailment and other
health problems. She honestly disclosed the true facts concerning her medical history to the
insurance agent. However, the agent did not include all the facts in the application. Instead, the
agent stated that he was going to cover the material facts in a separate letter to the insurance
company’s underwriting department. However, the agent did not furnish the material facts to the
insurer, and the contract was issued as standard. A claim occurred shortly thereafter. After
investigating the claim, the insurer denied payment. Nicole contends that the company should
pay the claim because she answered honestly all questions that the agent asked.

a) On what basis can the insurance company deny payment on the claim? Discuss.

Ans: The insurer could attempt to deny payment of the claim on the basis of material
concealment.

The insurer can deny payment based on the misrepresentation in the insurance contract.
Misrepresentation in insurance contracts may lead an insurer to treat a policy contract as void.

The insurer can deny base on concealment which is failure to disclose a material fact in a
wilful manner. For example, Nicole has a chronic liver ailment and other health problems and
she honestly disclosed the true facts concerning her medical history to the insurance agent.
However, the agent did not include all the facts in the application.

The insurer also can deny the payment based on fraudulent misrepresentation which is
deliberately disclosing false or misleading information on a material matter or with the intention
of suppressing such facts. For example, the agent stated that he was going to cover the
material facts in a separate letter to the insurance company’s underwriting department even
though Nicole had told the agent about her concern about her medical history.
b) What legal doctrine can Nicole use to support her argument that the claim should be
paid? Discuss.

Nicole can use the law of agency, the Principal-Agent Relationship, in which the agent
represents the insurer, promoting and selling the products and services available with the
ultimate result that there is a contract between the policy owner and the insurer. In the
insurance industry, agents are appointed by a written agreement with the insurer and their
primary objective is to secure new business for the insurer. For example, the agent purposely
hid part of the truth and stated that he was going to cover the material facts in a separate letter
to the insurance company’s underwriting department.

Ans: The principal is responsible for all acts of the agents when they are acting within
the scope of their authority. Also, knowledge of the agent is presumed to be knowledge
of the principal with respect to matters within the scope of the agency.
EXP In this case, the agent knew that Nicole had a health problem and deliberately
omitted this information from the application. This knowledge is imputed to the insurer.
Con: Thus, if the insurer issues the policy, it cannot later attack the validity of the policy
on the grounds that Nicole concealed a material fact.

ANS: Based on the doctrine of estoppel, the company could not deny liability for the
claim.
EXp: The agent told Nicole the health information would be given to the underwriters.
Nicole relied on the agent’s statement and believed she had coverage.
CON:Since the insurer is responsible for the acts of agents, including acts of omission
and fraud, the company cannot deny liability for the claim.

6. There are several requirements or elements of a contract that must be fulfilled in order
for an insurance contract to be deemed valid.

Required:
i) Discuss how each of these requirements is fulfilled when an applicant applies for a life
insurance policy.

Offer

- The offer is made by the applicant when the insured completes the applicant form and
forwards it to the insurer. Insurance agents and intermediaries who promote the product and
services of the insurer are deemed to be inviting the applicant to make an offer.

Acceptances
- The acceptance of the offer is made by the underwriter on behalf of the insurer.

- The underwriter may decline to accept a risk or impose certain conditions before willing to
accept a risk. If such conditions are imposed, these are deemed to be “counter offers” made to
the proposer and it is now for him to make a decision whether to accept or not. Common
examples of conditions imposed for life or medical insurance are health loadings, occupational
extras, lien or specific exclusions for certain medical conditions

Consideration

- The consideration is the premium which has been agreed upon in advance. In life insurance
policy, the premium may be made monthly, quarterly, semi-annually or annually.

Meeting of the mind

- Insurers do not accept all types of risks, they will only consider risks which are within their
acceptable limits.

Legal Capacity to Contract

- Individuals as a general rule have the capacity to enter into contracts provided they are
mentally sound and have attained the age of majority.

-However, special exceptions have been made with regards to life insurance contracts
according to Financial Services Act 2013. A minor who age 16 may affect a life policy on his
own or on the life of another in which he has an insurable interest.

- If further provides that a minor aged 10 to 16 may effect a policy on his own/on the life of
another with the written consent of his parents or guardians.

Legality of the Contract.

-Legality of purpose in insurance contracts is seen in the principle of insurable interest.

-The applicant must have an insurable interest in the subject matter to be insured. There must
be a financial & legal interest relationship existing between the applicant & the subject matter to
be insured.

- In the case of a life insurance policy, the owner of the policy must always have an insurable
interest in the life of the insured.

ASW: a)i) Elements of a life insurance contract: 1. Offer: In insurance contracts, the offer
is made by the applicant/proposer when he completes the application form & forwards it
to the insurer. Insurance agents & intermediaries who promote the product & services of
insurers are deemed to be ‘inviting the applicants’ to make an offer.
2. Acceptance: The acceptance of the offer is made by the underwriter on behalf of the
insurer. The underwriter may decline to accept a risk / impose certain conditions before
willing to accept risk. If such conditions are imposed, these are deemed to be ‘counter
offers’ made to the proposer & it is now for him to make a decision whether to accept /
not. Common examples of conditions imposed for life insurance are health loadings,
occupational extras, lien & specific exclusions for certain medical conditions.

3. Consideration: Consideration in all insurance contracts is the premium that has been 4
agreed upon in advance. In life insurance contracts, the premium may be made monthly,
quarterly, half-yearly or annually. The first full payment of the premium, irrespective of
the mode or periodicity, brings the contract into force.

4. Capacity to Contract: Business organizations including companies have the capacity

to enter into insurance contracts as this is incidental to business activities. Natural
persons (individuals) as a general rule have the capacity to enter into contracts provided
they: a. Are mentally sound. b. Have attained the age of majority, which in Malaysia is 18
years. However, in the Insurance Act 1996 (replaced by Financial Services Act 2013),
special exceptions have been made in with regard to life insurance contracts. It provides
that a minor who has attained the age of 16 may effect a life policy on his own life or on
the life of another in which he has an insurable interest. If further provides that a minor
aged 10 to 16 years of age may effect a policy on his own / on the life of another with the
written consent of his parents/guardians. This applies only to life insurance policies

5. Legality of Purpose: Legality of purpose in insurance contracts is seen in the principle

of insurable interest, i.e. who has a right to apply for an insurance contract? The
applicant must have an insurable interest in the subject matter to be insured. There must
be a financial & legal interest relationship existing between the applicant & the subject
matter to be insured. Common examples when insurable interest is deemed to be present
are: a. Spouses on each others’ life b. Parents on the lives of children c. Business
owners on each others’ lives d. Employer on the lives of employees (or Key-Person) e.
Lender on the life of a borrower The categories of relationships are restricted because of
moral hazard risks. When a person is allowed to insure another, there is always some
element of moral hazard involved. The owner of a policy will have a financial benefit upon
the death of the insured. Thus insurers are very careful to allow a limited category of
relationships to be recognized as ‘acceptable risks’ to minimize the opportunity of policy
owners from benefiting upon the loss of life of another.

6. Meeting of minds: Insurers do not accept all types of risks. They will only consider
risks which are within their acceptable limits. It is therefore inevitable that they must
have all the necessary & relevant information on the subject matter before undertaking to
accept a risk. Thus the applicant is expected to disclose all information required in an
application form as truthfully & as honestly as he knows them to be. Failure to do so
have serious consequences. Even to the extent that the policy contract may be deemed
void by the insurer. There is a duty of utmost good faith by the applicant in an insurance
contract. This is because the insurer cannot possibly know all the relevant facts of the
subject matter to be insured & it is based on this information that the risk is assessed &
determined.

ii) Briefly discuss why it is important to know in an insurance transaction the parties who
make the offer and the acceptance.

This is important because the insured can always revoke his or her offer before there is an
acceptance, but not after. Acceptance, whether by the words or conduct, is not effective until it
is actually communicated to the insured by the insurer or his authorized agent.

It affect not only the validity of the contract but the time when it goes into effect.