Preamble
Most policy forms will commence with a form of preamble clause which will bring together the proposal form, declaration, schedule and the rest of the policy wording to form a simple contract. The binding of the proposal form and declaration within the terms of the contract strengthens the insurer’s common law rights in the event of misstatement in any answer. The preamble clause will make it clear that cover only exists in the event of consideration from the policyholder, which normally takes the form of payment of premium. Also, this clause may set out the territorial limits applicable to the policy and can be used to define common terms used throughout the contract.
Cover Sections
In most sub-classes of motor insurance there are four main covers:
- Act only;
- Third party;
- Third party, fire and theft;
- Comprehensive.
Most insurers used to print two policy forms for each class of business, that is to say comprehensive and third party only, the third party fire and theft policy being achieved by endorsement. Whilst some insurers still operate on this basis, the majority now use only one form for each sub-class of motor business, printed on the widest basis — comprehensive. Sections denoting the various aspects of cover combining to become the comprehensive policy are contained in the policy document. An endorsement or schedule indicates which of these sections are operative for the particular contract. Each cover section will include the conditions and exclusions particular to that section.
Accidental damage cover
Other than in respect of certain additional benefits, motor policies provide for settlement on an indemnity basis. The policyholder may recover only the value of his loss. This means that in normal circumstances a claim for the total destruction of the car is settled on the current market value of the vehicle. Depreciation from the value of the vehicle as purchased is taken into account and settlement is frequently at a Figure lower than the purchase price. Many policies will require the policyholder to declare a valuation for the vehicle which represents the maximum amount payable in the event of a total loss accident, but where this is not a provision of the contract appreciation as well as depreciation can affect the settlement figure.
In certain circumstances insurers will agree to issue a policy on an ‘agreed value’ basis. These are not common and are now normally found only for special risks, such as veteran and vintage cars, where the value can be expected to fluctuate and appreciation has as much effect as depreciation. For the policyholder to have the maximum benefit under such an arrangement it is necessary for him to revalue the vehicle at every renewal, and the insurer may require the valuation to be confirmed by a qualified person. The amended value will be endorsed on the policy annually and will run for the next period of insurance. It will be seen, therefore, that the renewal procedures under an agreed value policy are more complex and the cost of handling such a policy may be greater for both the broker and the insurer.
In respect of private car policies, some insurers are now offering to deal with a total loss of a new vehicle during its early life by replacement with an identical new vehicle without deduction for depreciation. These special terms may be extended beyond the circumstances of the vehicle being stolen or totally destroyed, to apply also when the damage to the vehicle exceeds a given percentage of the cost of the vehicle as new. Unless it is specifically extended, the damage section of a motor policy will normally exclude claims arising out of the loss of use of the vehicle. If a vehicle is lost or damaged the policyholder may well incur an expense beyond the cost of repairing the vehicle by hiring a replacement vehicle until his own vehicle is again roadworthy. This is not recoverable in normal circumstances under his or her own policy, but may be claimed from a third party if the third party were liable for the accident. Where loss of use cover is provided by the policy this is seldom on an indemnity basis, but is limited to a maximum sum in a given period.
Fire and theft cover
These covers may be included as sub-clauses within the accidental damage section, or may stand as separate clauses in their own right.
Third party cover
By provision of the Road Traffic Act the indemnity provided in respect of liability for death or bodily injury is unlimited, whereas, particularly under commercial contracts, the indemnity for liability for damage to property normally has an upper limit which generally varies between £250,000 and £1 million. In the light of current inflationary trends, one or two insurers are now providing unlimited property damage cover under their commercial vehicle policies without payment of any additional premium, and this could be a developing trend for the future. Where property damage cover is limited, increased limits of indemnity are usually available for an additional premium for normal uses. Certain risks may present special hazards which cause the underwriter to reduce the cover which would otherwise be offered, e.g. vehicles carrying explosive loads.
The indemnity provided will cover costs and expenses incurred with the insurer’s written consent in addition to any damages awarded. Normally, insurers will also pay solicitors’ fees for the insured’s representation at coroner’s inquests or for defence in a court of summary jurisdiction for proceedings arising out of any act which would give rise to indemnity under the policy.
Under this section, insurers may also offer to pay for full legal representation against proceedings for manslaughter or reckless or dangerous driving for anyone claiming indemnity under the policy. The cover provided will frequently be limited to such sums as £1,000, although some insurers now provide unlimited cover. Under some policies this cover will not extend to drivers under 21 years of age.
General exclusions
Exclusions and limitations which are general to the policy as a whole are grouped in one section. A standard approach will be that the insurer will not be liable under the policy if a vehicle is being used for purposes other than those permitted under the policy, or is being driven by a person or class of person not permitted under the policy. Associated with this, it will be stipulated that the policy will be inoperative if the insured does not hold a licence to drive a vehicle or, having held a licence in the past, is currently disqualified for holding or obtaining a licence. On the other hand, where another permitted person is driving without a current licence the exclusion of cover may not be so complete provided that the lack of a licence was not known to the insured. In these circumstances the policy will still indemnify the insured, but not the driver. The permitted use and driving may be outlined in a schedule included within the policy, or the policy may state that these will be specified in the certificate of insurance issued.
The general exclusions will also contain two limitations where the wordings are common throughout the motor insurance market, the first being the exclusion of any liability arising out of any nuclear or radioactive cause, and the second being any consequence of war, invasion or act of a foreign enemy.
Conditions
A conditions section will cover the general operations of the policy and, for example, will give details of the insurer’s requirements for claim notification. Under the 1986 Statement of Insurance Practice insurers agree to require notification only as soon as reasonably possible, and will interpret any existing alternative wording on this basis.
The rights of cancellation will be set out within this section, and these will differ between the policyholder and the insurer. The insurer will normally have an absolute right to cancel the contract, subject to giving seven days’ notice in writing. It should be remembered that, if the certificate of insurance is not returned, ‘Act’ liability will still attach to the insurer, and therefore no return of premium will be agreed until the certificate is returned or a suitable declaration is made. When an insurer exercises his right of cancellation the pro rata balance of premium will be returned once the certificate situation has been clarified. The policyholder, on the other hand, if cancellation rights are given will be entitled to a return of premium only provided no claim has been made, and then subject to the insurer’s normal short period rates applying for the period that insurance has attached. A broker cannot issue cancellation instructions due to non-payment of premium. This can only be done by the insurer within the terms of the policy.
The policyholder will be required to take reasonable care of the vehicle and to ensure that it is in a roadworthy condition. Only in extreme circumstances would most insurers invoke this condition when dealing with a claim, but clearly lack of proper maintenance can increase the risk or cost of an accident. It is unfortunately true that several serious coach accidents in the last few years have been caused by the condition of the vehicle, due to such items as faulty brakes or worn or damaged tyres. It should be remembered that in these circumstances, even if an insurer has to make a third party payment because of the terms of the Road Traffic Act, this condition will give them a right of recovery against the policyholder.
The principle of indemnity permits the policyholder to recover the cost of repairing a vehicle up to its current value. He is not permitted to make a profit by being placed in a better financial situation after the accident than before it. A natural corollary, therefore, to indemnity is the principle of contribution. Where an identical risk is insured by more than one insurer, the policyholder is entitled to claim only the amount of his loss in total from all the insurers. Most motor policies will contain a clause confirming this and setting out that each insurer will pay only a contribution to the loss in these circumstances. The strict interpretation of this clause is varied by market agreement in circumstances where a person driving a vehicle other than his own is indemnified as an additional driver by the policy specifying that vehicle and is also indemnified under the ‘driving other cars’ clause of his own private car policy. By market agreement in these circumstances the indemnity will be provided by the policy specifically insuring the vehicle, unless the claim occurs when the vehicle is being driven by a motor trader or his employees, and there is in force a motor trade policy. In these circumstances the motor trade policy will provide the indemnity, although the description of vehicle provided by that policy is not specific to the vehicle concerned. This market agreement was introduced to protect employees from losing their entitlement to no claim discount under their own private car policy by the involvement of the ‘driving other cars’ clause in respect of an accident while they were driving an employer’s vehicle for business purposes. Insurers have a common law right after making a payment under a policy to take over any rights possessed by the policyholder against a third party in respect of the accident. The insurer would have to exercise these rights in the name of the insured. This common law position is strengthened by a condition in the policy giving the insurer the right to require the policyholder to pursue the claim against other parties.
Avoidance of certain terms and subrogation rights
Reference has already been made to the duties placed on an insurer to provide indemnity in respect of claims within the terms of the Road Traffic Act, despite non-observance of policy conditions. This clause makes it clear that nothing in the policy limits the right of any person to be indemnified by the policy within the terms of the law, but sets out the insurer’s right to request the insured to pay all sums to the insurer which the insurer would not have been liable to pay but for the provision of the law.
Emergency treatment
A motor policy also normally includes a statement that payments made for emergency treatment in the terms of the Road Traffic Act will not be deemed to be a claim so far as the policyholder’s entitlement to no claim discount is concerned. Under the Road Traffic Act, emergency treatment fees have to be paid in respect of any person injured in an accident involving a motor vehicle, irrespective of the liability of the vehicle driver.
This element has given rise to many complaints to hospital authorities and insurers. These complaints were amplified in the Rayner Scrutiny Report (published May 1985) which also referred to the administrative difficulties and costs of collection. The relevant section of the Road Traffic Act is to be repealed.
No claim discount
The majority of motor policies offer a discount from future renewal premiums following a period in which no claims are made under the policy.
The policy form will set out the no claim discount entitlement, which could consist of an increasing percentage for a given number of years without a claim. Under a private car policy this can range from 25/30% after one claim-free year to 60/65% after five or six years. The discount under other classes of motor policy will be more limited. The clause will also indicate the penalty to be suffered if a claim is made. Full entitlement to discount may be lost, but under a private car policy entitlement can be reduced by two steps back on the NCD scale, e.g. 60% will reduce to 40%.
Claims solely in respect of broken windscreens or glass, or those paid merely because of the terms of the knock-for-knock agreement, do not usually reduce the right to discount.
Originally a no claim discount reflected the claims position only under the specific policy, but competition led insurers to offer to transfer the discount earned under a competitor’s policy. The discount, however, had to be ‘earned’ under a motor policy and entitlement ceased two years after policy cancellation. In view of the high level of discount offered under private car policies, the majority of insurers now offer a first time proposer ‘starter discounts’ in respect of this class. These recognise a period of claim-free driving which has not been covered by insurance in the proposer’s name, e.g. the proposer may have driven for his employer. The percentages offered and the rules of entitlement vary among insurers, but discounts up to 50% are available.
Mid-term adjustments
Mid-term adjustments or alterations to any motor insurance policy are inevitable. In the past they frequently meant initially the issue of a cover note, the collection or return of premium, and the subsequent issue of permanent certificates and endorsements. Because of the work involved they were time-consuming and expensive but in overall terms little was achieved, because the additional and return premium arising from the transactions tended to balance. Since the tariff was disbanded in 1968 there has been a move in the motor insurance market to eliminate or reduce the effect of as many mid-term alterations as possible. Simplification of premium structures has meant that a change of vehicle often does not affect the premium. Minimum additional and return premiums have been introduced, and this has also assisted in reducing the number of accounting entries necessary for changes part-way through a policy year.
The most frequent change under any class of motor policy is in respect of the vehicle. This has been simplified for private car insurance by the introduction of the open or blanket certificate which operates in respect of all vehicles owned by the policyholder. It should be remembered that the change of vehicles must be notified to the insurer even if amended documentation is not necessary.
Policy wordings often make automatic provision for changes of address, and some stipulate that the drivers and use permitted under the policy are those shown in the current certificate of insurance. These changes have gone a long way towards the elimination of policy endorsements in respect of such changes. The issue of a revised certificate will simultaneously amend contract terms.
Where the basic cover is altered a temporary cover note may be issued and an endorsement to the policy will be issued. Insurance brokers must consider carefully all changes in the vehicle, drivers or use, and issue a cover note if the certificate in the insured’s possession does not adequately cover the amendments.
