The rules of law governing the formation of contracts of insurance are those which govern the formation of most other contracts.42 Contracts generally are made when the offer of one party, typically called the proposer, is accepted by the other party; and contracts of insurance are made when the offer of one party, typically the applicant for insurance, is accepted by the other party, the insurer. Commonly, however, the applicant obtains a prior quotation from the insurer which, in the language of contract law, is not an offer but an “invitation to treat.” If then the applicant “accepts” the quotation by completing the insure’s proposal form on that basis, the form is the offer to be accepted (or not) by the insurer.
If indeed the insurer is not willing to accept the offer, the insurer may respond with a counteroffer,43 which may then be accepted by the applicant. However, sometimes the latter may meet the counteroffer with a further offer for acceptance (or rejection) by the insurer. This process continues until the counteroffer of the one or other is finally accepted or rejected. The template of offer and acceptance, although useful,44 is not a rigid or exclusive process for testing whether a contract has been agreed.45 Sometimes a contract is the product of negotiations rather than simply the acceptance of an offer.
In all cases, documents contain the terms necessary to support a contractual relationship:
- the identity of the parties;
- the type of cover;
- the limits of cover;
- the period of cover;
- the basis of cover, for example, occurrence or claim;
- the form of policy wording.
Some degree of negotiation usually precedes insurance contracted on the Lloyd’s market, which has particular features.46 Traditionally, the process of negotiation has two significant stages. The first is the production of a slip by the applicant’s broker. Then the slip is taken around the Lloyd’s market and becomes the contract of insurance between the parties who have agreed it, the policy issued later being no more than a record of what has already been agreed (expressly or implicitly).
Today, however, there seems to be no rigid rule about the relationship between slip and policy. In Youell,47 for example, Phillips J. said that if:
“differences between the wording of the slip and that of the formal contract which is embodied in the policy give rise to the possibility that the natural meaning of the slip differs from that of the policy, the natural assumption is and should be that the wording of the policy has been designed the better to reflect the agreement between the parties.”
However, in this and other such cases, it was common ground that the parties intended the policy to supersede the slip.48 The slip may well retain at least some of its traditional importance. In one such case,49 faced with an apparent inconsistency between slip and policy, the Court of Appeal referred to both and reconciled their terms.50
Today, too, it is possible to conclude contracts electronically by placing risks in the market by data interchange using ACORD standards. Such innovations, however, do not alter the basic legal analysis of the conduct of business at Lloyd’s.
Many contracts of insurance are concluded simply by the insurer’s acceptance of an application for insurance submitted by an applicant, the person seeking insurance, on a form drafted and made available to such persons by the insurer (as described earlier in section 2.1). The statements made in the form by the applicant, statements about the applicant’s circumstances and thus about the risk to be insured, are important. They are usually representations of fact that, if untrue or significantly incomplete, may entitle the insurer to rescind the resulting contract of insurance.51 Further, if there is a statement in the form called the “basis clause,” it might become a term of the contract itself.52
Sometimes applications are completed by the person seeking cover with the help of the insurer’s agent. Difficult issues have then arisen concerning whether the agent is acting as the agent of the applicant or of the insurer.53 However, liability insurance, especially professional indemnity insurance, is usually negotiated with insurers by an intermediary evidently acting for the applicant, and these issues are unlikely to arise.
Sooner or later a critical moment occurs when it appears that one party has made a definitive offer for acceptance or rejection by the other, and on which attention is focused to determine whether it is indeed such an offer. For there to be an offer, there must be sufficient certainty: certainty about the terms agreed, as well as certainty of intention, in the sense of willingness to be bound in those terms on the part of the alleged offeror.
Courts are slow to infer that an alleged offer is indeed an offer in law, unless the offer and, therefore, the prospective insurance agreement is clear and certain in its terms. Courts approach the exercise of assessment with the positive attitude that a liberal construction should be put upon the terms, so as to uphold the agreement as a contract.54 Ambiguity in the terms is generally fatal to enforcement, unless it is in terms of very minor significance.55
Terms of more than minor significance, terms essential to liability insurance contracts are these: terms which state the identity of parties to the contract,56 the kind of liability covered57 and, as no insurer will undertake limitless amounts of liability, the limits—whether the aggregate limit or the limit per claim.58