Study 10 – Insurance Documents and Processes

The Application

An application is a request for insurance. Applications can be either written or oral.  An oral application is one where an insured relates the details of the risk orally and the broker writes down the information and submits it to the insurer.

Brokers and agents are intermediaries and responsible for disclosing all material facts and making sure the doctrine of utmost good faith is upheld.

Oral vs. Written Applications

Legislation dictates written applications are necessary for accident, sickness and life. Automobile applications can be submitted orally but the insurance company must send a copy of the application to the insured for signature and return.

Not all classes of business require written applications, but many companies make it their policy to obtain them. Written applications are always preferable because:

• Sometimes the application forms part of the policy.
• To avoid honest misunderstandings.
• To help prevent fraud, estimated 2.3 billion dollars annually.
• To prove misrepresentation an insurer must; prove there is a misrepresentation and that it as made at the time of the application. Courts will always favour insureds.

Content of a general application:

Name of applicant, Address of applicant, Previous insurance history has applicant had insurance declined, cancelled or refused, Previous loss or claims history.  Plus questions dealing the physical risk and any moral hazard.

Application information will be collected by the broker and submitted to the underwriter. The underwiter can either: accept rate and issue the policy, accept with conditions rate and issue the policy or reject the application.

Temporary Insurance

A binder is usually issued by the insurer while awaiting all the necessary information to issue the policy. It is an agreement to insure effective the date on the binder. Binders must have an expiry date.

A cover note is issued by the broker or agent to notify the insured what coverage is in effect, until the formal policy can be issued.

Problems with binders include: Was a contract actually made? Does the agent have authority to bind?

    What are the provisions of the binder? A binder should include:

• The name and address of the insured, risk location, coverage effective date, coverage expiry date, property description, amount of insurance, type of contract, special terms (deductibles).

Temporary insurance coverage is for a fixed period of time, coverage will expire on that date. Otherwise temporary coverage must be cancelled the same way as a policy with a proper period of notice given in a proper manner or by mutual agreement or surrender of the document.

The Policy

A policy is evidence of the contract between the insured and the insurer.

Parts of an insurance policy: Declarations, Insuring Agreement, Statutory Conditions, Policy Conditions, Signature Clause.  

Declarations: a) identifies the parties to the contract,  b) effective and expiry dates, c) states premium, d) shows the amount insured, e) shows other interests (loss payees) f) description of the subject of insurance.  

Insuring Agreement: a) description of the property covered, b) perils insured, c) exclusions,

d) circumstances of payment.  Contra Preferentum – the onus is on the insurer to make the contract clear, in the case of ambiguity the court will always rule in favour of the insured.

Statutory Conditions: are required by law on accident and sickness, automobile and fire policies. The conditions set down the rights and obligations of the insurer and the insured. In Quebec these regulations are called General Conditions.

Policy Conditions: Are clauses that mandate the actions of the insured and insurer.  Conditions of they are breached by the insured can void a policy or claim. If an insurer breaches a condition the insured may be indemnified for the loss.  A warranty is a promise from the insured that something will continue for the duration of the policy.  A representation is a statement of an existing fact at the time.

Signature Clause: The signature of the CEO of the insurance company and countersigned by an agent or employee of the company. The insured’s signature is not required except on certain types of bonds.

Assignment of Insurance Policies

Insurance contracts can not be assigned to another party. The insurer must consent to contract with the other person. For example, a homeowners policy will not carry to the new owners when the property is sold. If the insurer does consent to an assignment the steps to be taken are: The former owner signs off, the new owner provides person details and the insurer issues an endorsement changing the policy.

Consent is not required: under the Bankruptcy Act, or transfers to the estate of a named insured.

Assignment of Proceeds of Insurance Policies

Consent is not required if an insured wishes to assign the proceeds of an insurance policy.

Cancellation of the insurance policy is governed by the Statutory conditions or the cancellation clause.

Short rate cancellation – when insured cancels before the expiration date of the policy, it is the unearned premium plus less a penalty percentage to cover administration expenses.

Pro rata – when the insurer cancels the unearned premium is returned in full.

A reinstatement endorsement will put a cancelled policy back in force.

A Lapsed or expired policy is one whose term has expired and not been renewed.

Forms of Policies

There are many forms of standardized policies being used today. Policies were standardized by:

1) legislation e.g. the automobile policy, 2) general usage – cost effective and expedient  3) court decisions insurers may be reluctant to change wordings because of the volume of case law.

A manuscript policy is designed for a particular risk.

A subscription policy is one where more than one insurer participates and is issued by the lead company.

Certificates of Insurance verify the existence of insurance (e.g. a pink slip in Ontario automobile).

An endorsement is used to make changes to a policy. It can override the wordings and requires the insurers signature.

Sample Exam Questions – Principles & Practices

Multiple Choice Questions

December 2001

1. A binder
1. Cannot be arranged by phone
2. Is a temporary insurance undertaking
3. Is an insurance package
4. Must always be in writing

2. The term contra proferentum means
1. A counter-offer made in connection with a settlement of a claim
2. That, if the wording is ambiguous, any dispute about the policy will be settled in favour of the insured.
3. That, once the insured accepts the policy, there can be no contrary arguments to its wording.
4. Without prejudice

3. In Insurance terminology, a warranty is
1. A policy exclusion
2. A promise by the insured
3. A promise by the insurer
4. The equivalent of a representation

4. A fire insurance policy
1. Can be assigned by the insured as he wishes since it is a personal contract
2. Can be assigned without the insurer’s consent only if the property is sold
3. Can be assigned without the insurer’s consent only in certain circumstances
4. Cannot be assigned by the insurer under any circumstances

5. Short Rate termination is used when
1. An insured fails to pay the premium
2. An insured terminates a policy before its natural expiry
3. An insured’s insurable interest ceases
4. An insurer finds that a breach of the duty of good faith has occurred

July 2001

6. A  binder
1. Can be granted by an agent or a broker
2. Cannot be terminated once it has been issued
3. Is a temporary insurance undertaking
4. Must always be in writing

7. The term contra proferentum means that
1. Any policy ambiguity will be interpreted in favour of the insured.
2. Any policy ambiguity will be interpreted in favour of the insurer.
3. Following the acceptance of the policy, the insured cannot contest the intent of the wording
4. Once the policy has been issued, the insurer cannot contest the intent of the wording.

8. In insurance terminology, a warranty is
1. A promise by the insured that a specific state of affairs will continue to exist throughout the term of the policy.
2. A promise by the insurer to pay for certain types of claim
3. A type of policy exclusion
4. The equivalent of a representation

9. Which of the following is true of termination?
1. Temporary insurance may be terminated orally
2. Termination provisions are found in the Statutory/General Conditions of certain policies.
3. When a policy is terminated, it must be returned to the insurer.
4. When an insured terminates a policy, the premium is always refunded on a pro rata basis.

April 2001

10. Written applications
1. Are preferable to avoid misunderstandings
2. Are required by statute in some classes of business
3. Have no advantage over oral applications
4. Must be signed by the applicant and sent to the insurer within 5 working days

11. A binder
1. Is a memorandum of an agreement to insure
2. Is an all inclusive insurance package
3. Cannot be terminated once it is issued
4. Must always be in writing

12. A document issued as evidence of temporary insurance need not contain which of the following?
1. Amount of insurance bound
2. Amount of premium
3. Deductibles
4. Time and date of coverage inception and expiry

13. The Statutory Conditions (Common Law) are
1. Determined and designed by each individual insurer
2. Required on all policies
3. Required on policies covering certain classes of risk only.
4. Binding on the insurer but not the insured

14. Temporary Insurance
1. May be terminated by a telephone call to the broker who issued it
2. Must be terminated by registered letter when a policy is issued
3. Must be terminated in the same way as a policy of similar type would be terminated
4. Once issued, cannot be terminated, it remains in force until a policy replaces it.

December 2000

15. A written application is always preferable because it
1. Avoids misunderstandings
2. Is mandatory in most types of insurance
3. Prevents misrepresentation
4. States clearly the object of insurance

16. In insurance terminology, a warranty
1. Guarantees there will be no change to the risk without notification
2. Is a guarantee that the insured property will remain intact
3. Is a promise by the insured that a certain state of affairs will continue to exist
4. Warrants a state of affairs that exists at the inception if the policy

17. Short Rate termination is used when
1. Less than a predetermined number of months remain in a policy term
2. The insurer terminates a policy at the request of the insured
3. The insurer terminates a policy for non payment of premium
4. The rates had originally been discounted

18. A certificate of insurance
1. Is a copy of part of the policy
2. Is a copy of the policy
3. Is a modified form of the policy
4. Replaces the original policy when the insured requires a copy

July 2000

19. The term “contra proferentum” means
1. Without prejudice
2. A counter offer made in connection with a proposed contract
3. That the wording of the contract speaks for itself
4. That any ambiguity in a contract will be interpreted against the offeror

20. A short rate cancellation is used when
1. A policyholder cancels a policy before its natural expiry
2. A policyholder fails to pay the premium
3. An insurer finds that a breach of the duty of good faith has occurred
4. A policyholders insurable interest ceases

Essay Questions

December 2001

1. Contrast a warranty with a representation and give examples. (5 marks)

December 2000

2. Identify FOUR (4) main sections of an insurance policy and briefly describe what you would find in each one. (12 marks)

July 2000

3. What is a binder? (2 marks)
4. List EIGHT (8) particulars that should be included in a binder (8 marks)
5. Briefly explain why policy conditions are part of the insurance contract and describe the effect of a breach of condition by either party to the contract. (5 marks)

April 2000

6. Identify the FIVE parts of an insurance policy (5 marks)
7. Explain the advantages of written applications for insurance over oral applications   (5marks)
8. What is a binder (2 marks)
9. List EIGHT (8) particulars that should be included in a binder. (8 marks)