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Insurance is an agreement between an insurer and an insured whereby the insurer agrees to compensate the insured for loss in certain circumstances. The insurance agreement is usually contained in a document known as a policy. Many types of insurance are available. The most common policies are:-

  1. Property insurance, commonly known as home and contents insurance;
  2. Life insurance, including disability policies;
  3. Liability insurance;
  4. Motor vehicle insurance.

Under common policies of general insurance, the insurer agrees to pay a sum of money to the insured if a loss covered by the policy occurs. In the case of home and contents and motor vehicle insurance, the insurer usually agrees to pay if the property is lost or damaged provided the damage occurred in certain circumstances. The main types of payment provisions are:-

  1. Indemnity - this means the insurer will pay the amount of the insured’s loss up to an agreed maximum. If the policy limit is $10,000.00 and the loss is $14,000.00, the insurer only has to pay $10,000.00. If the loss is $7,000.00, the insured can only recover that amount, not $10,000.00.
  2. Agreed value - under this type of policy the parties agree on the value of the property. This can be important particularly in motor vehicle property insurance where the value of the vehicle can decline fairly rapidly. Life insurance is also a type of agreed value policy since the parties agree on the amount to be paid in the event of the death of the life insured.
  3. New for old - this is a type of agreed value policy. The insurer agrees to pay the full cost of any damaged property covered by the policy. However, these policies usually require that the property be insured for at least 80% of its value, otherwise averaging provisions will apply.

To obtain insurance, the insured must usually complete an application form known as a proposal. The parties to a contract of insurance owe each other a duty of the utmost good faith. For the insured, this means the proposal form must be filled out as fully and truthfully as possible. The insured person must disclose matters that are relevant to the proposed insurance contract even though not enquired about specifically in the proposal form. For example, a proposal form for fire insurance over a house may not specifically ask what is intended to be kept at the house. However, if the applicant knows that he is going to store a large quantity of flammable chemicals at the house, that information must be disclosed.

If an insured person is guilty of misrepresentation on a non-disclosure, then an insurer can:-

  1. Avoid the contract completely, if the non-disclosure or misrepresentation is fraudulent.
  2. Reduce its liability in respect of a claim under the policy to the amount which would place the insurer in the same position as if the non-disclosure or misrepresentation had not been made. This can result in an insurer’s liability being reduced to nothing.

It should be noted that simply because there is no fraud, it does not mean that a claim will be paid, even in part. When an insured person is guilty of misrepresentation or non-disclosure, the insurer can avoid the contract completely if fraud is involved or within the first three years by notice in writing, vary the policy terms to reduce the sum insured.

An application for insurance will often be filled out by an insurance agent. This can cause a number of problems. The Insurance Agents Brokers Association makes an insurer responsible for the conduct of its agents or employees are relied on reasonably and in good faith by a person seeking insurance. The insurer is liable to the insured for any loss or damage suffered by the insured as a result of the conduct of its agents or employees.

Some policies, particularly home and contents policies, include an averaging clause. This means that when property is insured for less than its value, claims are not paid in full. The percentage of a claim paid is equal to the percentage of the property’s value which has been insured. For example, if you have a valuable painting in your house, which was insured for $5,000.00 but it was worth $10,000.00, then only 50% of its value is insured. Therefore, if the painting suffered $6,000.00 worth of damage, the insurer could rely on an averaging clause to justify payment of only $3,000.00 or 50% of the claim.

The Insurance Contract Acts does place limitations on the effect of averaging clauses. The legislation means that:-

  1. An insurer cannot rely on an averaging clause unless the insured is clearly informed of the effect of the clause in writing before the contract is entered into.
  2. Averaging clauses have no application where the sum insured is 80% or more of the value of the property.

Therefore when something is insured for less than 80% of the value of the property, the insurer may reduce the claim.

When making a claim, the insurer should be contacted immediately. Most insurers will require a claim form to be filled out. Insured people must exercise the utmost good faith in filling out claim forms and should provide every possible detail of the loss.