Lecture 5: Coverage & Terms of Insurance Contracts

Perceived Risk

• The possibility of damage or loss that motivates a policyholder to seek insurance.

Insured Event:

• How a covered risk is specifically described within an insurance contract

• (e.g., "damage attributed to fire or explosion").

Insurance Cover:

• The contractually defined extent to which an insurer is willing to take over a risk from the policyholder

• Limited by policy terms, exceptions, and conditions.

Freedom of Contract

• Insurers are free to set their own boundaries for cover

• Parachute glider case (2006),

  • Dutch Supreme Court ruled that an insurer is at liberty to define primary cover boundaries, and these descriptions are not generally subject to requirements of good faith or reasonableness.

• Chubb/Dagenstaed (2008),

  • Court confirmed insurers can distinguish between factual settings that lie close together, such as the "artificial" distinction between liquid pouring versus gasses spraying.

Theoretical Examples of Drafting Insurance Cover

• Sculptor (chipping away what is not covered)

• Potter (modeling what is covered by adding and shaping).

Four Components of Coverage

• Primary Description of Risk:

• Exceptions/Exclusions:

• Warranties:

• Conditions:

Primary Description of the Risk

• Stated in positive terms; the burden of proof rests on the insured to show a "peril insured" occurred and caused the damage.

Exceptions / Exclusion

•  Stated in negative terms; these are circumstances not covered by the policy. The burden of proof that an exception applies rests on the insurer.

Warranties

• Effectively a promise or guarantee from the insured aimed at risk prevention (also called "precautionary measures").

• A breach may lead to a loss of coverage rights.

Conditions

• Administrative rules intended to make the contract less burdensome for the insurer, such as requiring notice of a claim within 48 hours.

• Condition precedent: if the insured doesn’t do x, coverage never triggers

Warranties: Common Law

• Under general common law, a "condition" is essential to the contract's essence (allowing termination upon breach), while a "warranty" is collateral/secondary (allowing only for compensation).

• The Insurance Act 2015: This act changed the strict old rule where a breach of warranty resulted in automatic termination.

  • New Rule: A breach now leads to a suspension of cover only for the duration of the breach.

  • The insurer is not liable for losses occurring after a breach but before it has been remedied.

PIECL

• Uses the broad term "precautionary measures" to encompass warranties and conditions precedent.

  • PEICL aims for equal treatment: termination for a breach is only possible if there was intent to cause loss or conscious recklessness.

  • Payment reductions are based on the degree of fault of the insured.

Dutch Law

•  (Biçak/Aegon): In this case, an insurer denied a fire claim because the insured used plastic instead of metal waste buckets.

  • The Supreme Court ruled that while an insurer can invoke such clauses, it may be unacceptable under reasonableness and fairness if there is no causal relationship between the breach and the loss (e.g., the fire started in a meter box, not the bucket).

Limitations: Insureds Own Fault

• Direct Intent: Acting with the specific object of causing damage.

• Certainty: Acting with the knowledge that damage is a certain result, even if not the primary objective.

• Conditional Intent: Willingly exposing oneself to a considerable probability that an act will lead to a certain result.

Conditional Intent

• The Beer Glass Ruling (1975): A man threw a glass at a fence in anger, and splinters blinded a bouncer.

• The court ruled that while direct intent is never insurable, conditional intent could potentially be covered if the exclusion clause was not formulated broadly enough to include it.

Negligence

• Statutory law generally allows recovery for losses caused by negligence.

• Devco/Legal & General (1988): Leaving keys in an unlocked car was considered gross negligence, breaching a clause to take "all reasonable steps" to protect the vehicle.

• Sofi/Prudential (1990): Leaving jewellery in a locked glove compartment for 30 minutes was not considered reckless or gross negligence by the Court of Appeal.

Dutch Law Overview

• Freedom of Contract: This is the foundational principle, granting insurers the liberty to define the boundaries of the risk they are willing to cover.

• Primary Cover Boundaries: The Dutch Supreme Court (Hoge Raad) has ruled that these boundaries are generally not subject to requirements of good faith, reasonableness, or fairness. Insurers can make "artificial" distinctions between similar factual settings, such as covering gas explosions but not liquid leaks, provided the distinction is clear to the policyholder.

• Preventative Guarantees (Warranties): While a breach of a warranty typically results in the loss of coverage, the court in Biçak/Aegon (2000) established that invoking such a clause might be unacceptable if there is no causal relationship between the breach and the loss (e.g., using plastic bins when a fire started in a meter box).

• Intent and Recklessness: Under Article 7:952 DCC, insurers do not indemnify for losses caused by intent or recklessness. The Beer Glass ruling (1975) clarified that while direct intent is uninsurable as a matter of public policy, conditional intent might be covered if the policy's exclusion clause is not formulated broadly enough to exclude it

English Law Overview

• Warranties and Conditions: In English insurance law, these terms differ from general common law. Historically, any breach of an insurance warranty resulted in the automatic termination of the contract (discharge of the insurer's liability).

• The Insurance Act 2015: This act abolished automatic termination for breach of warranty, replacing it with a suspension of cover for the duration of the breach. The insurer is not liable for losses occurring while the warranty is breached but before it is remedied.

• Wilful Misconduct: Under Section 55(2)(a) of the Marine Insurance Act (MIA), insurers are not liable for losses attributable to the wilful misconduct of the insured.

• Negligence: Statutory law generally allows recovery for losses caused by negligence unless the policy specifically excludes it. Courts distinguish between gross negligence, such as leaving keys in an unlocked car (Devco/Legal & General), and actions that do not reach the level of recklessness, such as leaving jewelry in a locked glove compartment for a short period (Sofi/Prudential)

PIECL Overview

• Precautionary Measures: PEICL uses this broad term to encompass what English law calls "warranties" and Dutch law calls "preventive guarantees". It intentionally avoids narrow definitions so that insurers cannot achieve different legal consequences simply by rephrasing a requirement.

• Sanctions for Breach: PEICL sets a high bar for the harshest sanctions. Termination of the contract is only permitted if the breach was committed with intent to cause loss or conscious recklessness.

• Causal Relationship and Fault: For an insurer to exempt itself from liability, there must be a causal connection between the loss and the non-compliance. Furthermore, any reduction in payment must be proportional to the degree of fault of the insured

Belgium & Germany Overview

• Belgian Law: Article 62 of the Insurance Act 2014 states that an insurer cannot be obliged to provide cover for losses caused intentionally.

• German Law: Paragraph 81(1) of the VVG stipulates that insurers are not liable for losses caused intentionally.