Understanding
The Contract
18 April 2023
Last revised
minutes
3
Reading time
While your broker should understand and be able to explain policy terms to you, there can be ambiguity as to the role played by intermediaries. If you’re going to do your utmost to make sure that you remain covered, you need to be clear about the insurance contract itself, beyond deductible amounts. Underwriters are in business to make money and, despite marketing to the contrary, can and will fight larger claims.
minutes
3
Reading time
18 April 2023
Last revised
While your broker should understand and be able to explain policy terms to you, there can be ambiguity as to the role played by intermediaries. If you’re going to do your utmost to make sure that you remain covered, you need to be clear about the insurance contract itself, beyond deductible amounts. Underwriters are in business to make money and, despite marketing to the contrary, can and will fight larger claims.
Where there's a dispute, ambiguous terms in a policy are construed in favour of the insured .
Consumer protection may vary based on whether the insured uses the yacht privately or commercially.
Insurance contracts consist of four types of terms: terms descriptive of the risk, exclusions, warranties, and conditions.
Breach of warranty can release the underwriter from future liability or suspend coverage, while breach of a condition can lead to liability rejection or claims for damages.
Terms descriptive of the risk define the perilscovered , and the insured must prove that the loss resulted from one of these perils.
Exclusions limit the scope of coverage and suspend cover during the excluded circumstances.
Warranties are fundamental terms that must be strictly followed, regardless of whether they are labeled as such.
Conditions can be either conditions precedent (before coverage) or bare conditions (during the policy), and breach can result in different outcomes.
The insured party must have an insurable interest in the matter being insured, typically the owner of the yacht.
Other interested parties must be declared in the contract and can be entitled to notifications, but to claim directly, they need to be named as joint or co-insureds.
Exclusions limit the scope of coverage and suspend cover during the excluded circumstances.
Warranties are fundamental terms that must be strictly followed, regardless of whether they are labeled as such.
Conditions can be either conditions precedent (before coverage) or bare conditions (during the policy), and breach can result in different outcomes.
The insured party must have an insurable interest in the matter being insured, typically the owner of the yacht.
Other interested parties must be declared in the contract and can be entitled to notifications, but to claim directly, they need to be named as joint or co-insureds.
Where there's a dispute, ambiguous terms in a policy are construed in favour of the insured .
Consumer protection may vary based on whether the insured uses the yacht privately or commercially.
Insurance contracts consist of four types of terms: terms descriptive of the risk, exclusions, warranties, and conditions.
Breach of warranty can release the underwriter from future liability or suspend coverage, while breach of a condition can lead to liability rejection or claims for damages.
Terms descriptive of the risk define the perilscovered , and the insured must prove that the loss resulted from one of these perils.
Insurance contracts must set out the risk, the duration of cover, the premium and the amount payable in the event of loss. That’s it. They don’t need to be set out in any particular way. And, aside from marine insurance, they don’t even need to be in writing.
The policies for larger risks can be long-winded and written in rather theatrical terms. These old-fashioned words and phrases have well-known and judicially considered meanings and implications. In recent years, there has been a move towards simpler terminology – but such words may not have been considered in court.
In the event of a dispute arising between insured and underwriter, unfamiliar terms can lead to doubt. If words are ambiguous, they will be construed in favour of the insured. Whilst an owner who keeps the yacht solely for private use may be given the benefit of any doubt as a consumer, where the vessel is chartered or otherwise maintained on a commercial basis for tax reasons, this consumer protection evaporates.
Where words have a technical legal meaning, this definition will prevail, as will any definitions set out in the contract. Where there are rival meanings, the construction consistent with commercial common sense will triumph. The contract will also be construed in line with the purpose of the contract, such that insuring clauses are interpreted widely, and exclusions narrowly.
TYPES OF TERMS
Insurance contracts contain four types of terms. It’s important to know which category a term falls into, as this affects what happens where such terms aren’t complied with. The categories are:
Terms descriptive of the risk;
Exceptions and exclusions;
Warranties; and
Conditions.
For those who already know a little about general contract law, the terms ‘warranty’ and ‘condition’ are used differently. In insurance law, a breach of warranty can discharge an underwriter from all future liability, or may suspend cover for the period during which the insured is in breach, rather than merely rise to a claim for damages. Breaching a condition can give the underwriter the right to reject liability – or claim damages.
TERMS DESCRIPTIVE OF THE RISK
These are terms that describe the risk, and so define the cover in terms of the perils insured against. The insured must prove that its loss was caused by one of these perils.
EXCEPTIONS & EXCLUSIONS
Exceptions and exclusions set limits on the scope of the risk. They have the effect of suspending cover while the excluded circumstances are in effect.
WARRANTIES
Warranties are fundamental terms and must be strictly complied with. They may or may not labelled as such, but exist where the insured declares that something will or will not be done, or that a condition has or has not been fulfilled, or that it holds a particular intention or belief.
It used to be that underwriters made all kinds of terms warranties simply by including ‘basis of contract’ clauses. This is no longer allowed, but statements as to particular facts (past or present) can still be deemed to be warranties.
CONDITIONS
Conditions take the form of either:
A ‘condition precedent’, which requires compliance by the insured before being on-cover, and which, if breached, allows the underwriter to reject liability altogether; or
A ‘bare condition’, which requires compliance by the insured during the currency of the policy, and which, if breached, allows the underwriter to claim damages for any loss suffered as a result of a breach.
Examples of a condition precedent might be the payment of the premium, or compliance with claim notification requirements, while a bare condition might take the form of an obligation to give prompt notice to the underwriter of any circumstance likely to give rise to a claim, or a requirement to co-operate with the underwriter in respect to a claim. Either way, the underwriter bears the burden of proving that a condition has been breached. And labelling a condition as such is not conclusive as to its status.
INSURABLE INTEREST
It may sound obvious, but the party taking out the insurance must be the owner of the yacht – not the beneficial owner. Otherwise, in law, the beneficial owner would merely be taking a bet. The insured is said to need to have an ‘insurable interest’ in the matter being insured.
Other parties may have an interest which is insurable, and this must be declared in the contract. The noted party can be entitled to notification by the underwriter of changes to cover, cancellation or non-renewal. If such parties want to be able to claim directly from the underwriter, however, they need to be named either as joint or co-insureds in the policy.
Joint insureds each have a contractual right to indemnity, perhaps because they both jointly own a yacht. But the wrongdoing of one joint insured can preclude a claim by the other (innocent) joint insured. A co-insured, such as a mortgagor bank, is not precluded from claiming under such circumstances.
Thank you to all our Members who contributed to this article. Unless otherwise stated, this article broadly describes, by way of illustration, the situation in the United Kingdom waters in respect of United Kingdom-registered vessels. This piece does not provide or replace legal advice.
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