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The legal principals surrounding life insurance
Before starting this section we would remind you of the terms we use and the meaning we attach to those terms in this article. This document also assumes that the life insurance policy is subject to English law and follows standard English UK Life Insurance Market practice.
Life Insured |
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The person on whose life the life insurance policy is taken out. |
Insured |
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The person who takes out the life insurance policy and who contracts with the life insurance office. This is usually the person who will receive the benefits under the policy. |
Life office |
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The insurer issuing the life policy. |
Sum Insured |
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The amount payable on claim whether this is on the death of the life insurance or on maturity of the policy. |
Premium |
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The sum paid to purchase the life insurance policy or paid to keep the life insurance policy going, if it is a regular payment premium. |
Underwriting |
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The process by which the life office decides whether or not to accept the risk under the policy and at what terms that risk will be accepted. The terms will normally be premium rate and normal life insurance conditions, but in some case specific additional policy conditions could be included. |
Proposer |
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A person who applies for a life insurance policy. |
Legal principals of life insurance
Both the general principals of English law and some special laws relating to life insurance contracts, apply to life insurance policies.
The life insurance policy is a contract formulated between the insurer and the insured. This contract is therefore subject to the normal laws on contract.
Essential if a valid life insurance contract
There are five elements, which come from the law of contract, which are required for the life insurance contract to be binding. Other requirements also apply, and this is not an exclusive list.
- Offer and acceptance,
- Consideration,
- Capacity to contract,
- Insurable interest,
- Consensus ad idem.
Offer and acceptance
The general law of contract applies to life insurance with some amendment. The offer is not made by the life insurance office’s prospectus or advertisement; this is regarded simply as an invitation to treat.
An invitation to receive offers: The life insurance proposal form completed by the proposer is in English law considered the offer. The life insurance office can then either after due underwriting consideration accept or decline this offer. The life insurance office will show its acceptance of the offer, by issuing a letter of acceptance saying that it will issue the life insurance policy at set terms subject to the first premium being paid by the proposer (insured) within a specific time and on the understanding that the state of health of the life insured remains unchanged. This acceptance offer is a counter offer by the life office.
This letter of acceptance is at law a counter offer which the proposer can accept by paying the first premium. The legal authority for this is based on Canning v Farquhar. (1886).
In the case of Canning v Farguhar, Canning submitted a proposal for life insurance and the life office advised Canning it had accepted the proposal and advised canning of the premium rate, but advised that the insurance would not take effect until the first premium had been paid. Before Canning paid the premium he fell over a cliff and was seriously injured. The premium was then subsequently sent in but refused by the insurer. Canning then subsequently died.
The court held that the insurer was not liable because,
- The proposal and acceptance did not constitute a binding contract but merely part of the preliminary negations.
- As the acceptance contained a new term, the amount of premium, it was a counter offer which could not exist after the risk had changed since the statements in the proposal regarding good health had become untrue.
Many life insurance policies are paid by direct debit or standing order. In these cases it is considered that the receipt of the first premium is seen as the acceptance of the offer.
Under the Financial Services and Markets Act 2000 the insured has a 14 day cooling off period subject to certain requirements. If the insured uses this right the contract is cancelled and any premiums paid are refunded.
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Consideration