Formation of the Insurance Contract

‘2–2 An acceptance will be of no effect unless the parties have agreed upon every material term of the contract they wish to make. The materials terms are: the definition of the risk, the duration of the insurance cover, the amount and mode of payment of the premium and the amount of the insurance payable in the event of a loss. As to all these there must be a consensus ad idem, that is to say, there must be either an express agreement or the circumstances must be such as to admit of a reasonable inference that the parties were tacitly agreed.’

‘Courts of late have been keen to emphasise that an insurance policy is, fundamentally, a contract…The tacit message is that, as contracts, insurance policies should be treated under the general rubric of contract law.

Despite case-law admonitions to the contrary, insurance policies differ from traditional contracts. With a typical bilateral contract, the parties exchange performances and receive the benefits of performance simultaneously, and a breach is generally easily identifiable. With insurance policies, on the other hand, the insured tenders performance in the form of payments of premiums and the insurer is obligated to perform only if some event identified in the policy triggers performance — recall the concept of a condition precedent. Further, the insured typically does not assume an active role in negotiating or drafting the terms memorialised in the policy document itself.’

Lord Parker CJ:

‘This is an appeal by way of case stated from a decision of justices for the North Riding of Yorkshire sitting at South Bank who convicted the defendant of using a motor car on a road when there was not in force in relation to the user of the vehicle such a policy of insurance and such a security in respect of third party risks as complied with Part VI of the Road Traffic Act, 1960, contrary to section 201 of that Act. The justices in the event, in my judgment quite rightly, fined him a nominal amount, some £2.

The short facts were these. The defendant was found using the motor car on a road on 15 April 1964. In fact he had been insured by an insurance company called the Federated Employers’ Insurance Association Ltd, the policy expiring on 5 April. On 18 April he obtained a temporary cover note for 30 days from a fresh insurance company, and there is a finding by the justices that on the expiration of the old policy he never intended to renew it with the old insurance company. The case is not very illuminating; we have been told that the defendant never gave evidence, but at some stage the solicitor appearing for him produced a temporary cover note from the old insurance company, purporting to cover him for 15 days commencing from and including 6 April, when the insurance policy expired. Accordingly, on 15 April when he used the vehicle, that extended cover was on the face of it in force.

Bearing in mind that a valid insurance for the purposes of the section must arise from an enforceable contract, it seems to me that the contract, if any, contained in the temporary covering note must arise by offer and acceptance. It is conceded that the policy that expired had no provisions for extended cover, and accordingly this document sending this temporary covering note must in my judgment be treated as an offer to insure for the future. It may be, although I find it unnecessary to decide in this case, that there can be an acceptance of such an offer by conduct and without communication with the insurance company. It may well be, as it seems to me, that if a man took his motor car out on the road in reliance on this temporary cover, albeit that there had been no communication of that fact to the insurance company, there would be an acceptance, and that the contract so created would contain an implied promise by the insured to pay, either in the renewal premium when that was paid, or if it was not paid, for the period for which the temporary cover note had, as it were, been accepted.

I find it unnecessary in the present case to decide that matter, and for this reason, that it seems to me that the defendant must at any rate go to the length of saying that he knew of the temporary cover and that he took out his motor car in reliance on it. In fact, as I have already said, the defendant never gave any evidence at all. Further, from the justices’ clerk’s notes, which again we have been allowed to refer to, it appears that when he was stopped by the police and asked to produce his insurance certificate, he produced the old certificate of insurance which expired on 5 April, and he also produced the cover note from the new insurance company which commenced on 16 April. When the police pointed out that therefore on 15 April he was not covered, he not only did not refer to this temporary cover note, but he said then that he had been negotiating a change of insurance companies, and did not realise that it, presumably the original certificate, had run out. It was only at the hearing, and I think at the second hearing, that this temporary cover note, this extended cover, was produced by the defendant’s solicitor.

In those circumstances it seems to me that the defendant has never gone to the length of showing that he knew of the temporary cover, that he acted in reliance on it, and thereby had accepted the offer contained in it. I think that the justices came to a correct decision in law and I would dismiss this appeal.’

Lord Esher MR:

‘This seems to me to be a very important case in insurance law, and at the beginning of it I was much taken with the ordinary proposition that a proposal and an acceptance of that proposal make a contract. Whether that is so or not depends on whether the one was meant to be a proposal, and the other an acceptance by way of contract, and we are bound to look further and see what was the subject-matter. What is the contract of life assurance? It is this, “Taking the life to be good at the commencement of the risk I insure that life, for a year at a certain premium.” From this it is apparent that the material moment for the agreement as to the state of health is when the risk commences, that is, at the beginning of the year, for it is not denied that the agreement is only for a year. Now it is said that before that year commenced there was a binding agreement to insure. But is it possible to say that when parties are discussing beforehand the conditions of the risk they mean to treat what they then say are the existing facts as binding them when the moment to make the contract arrives? No one can bind himself as to the state of his health a short time hence, and a man who makes a statement as to his state of health cannot mean to be bound as to what it will be a month hence, neither can the person to whom the statement is made be taken to rely on it further than as it may guide him in accepting the insurance or not. These considerations show that all these statements which are made preliminary to the moment of insurance are not considered by either party as contractual statements, but as expressions of intention on the one side to insure, on the other to accept the risk. That seems to me to be the view at which we must arrive looking at this as a business transaction. Now there is no case that supports affirmatively this view, but it is supported negatively by the fact that during all the years that life insurance has been known and practised, there is no case in the books or known to any one in which an action such as this has been maintained. These considerations are conclusive to my mind that what was said was preliminary to the contract of insurance, and was never intended by either party to be a contract in itself.

From this it follows that after the insurance company have said that they accept the proposal, and that if the premium is paid they will issue a policy, although there is no change in the circumstances, and all that has happened is that they alter their mind, yet they are not bound to accept the premium. I do not shrink from saying that in my view of insurance law there is no contract in such a case binding them to accept the premium. If so this action fails, because tender is only equivalent to payment if the person to whom the money is offered is bound to accept it. If the premium is offered and accepted there is at once an insurance, and the year for which the insurance runs commences then, and if the policy is drawn up properly that will appear in it.

But then there is another view short of that. Supposing it to be true that after all the terms are agreed on, and the premium is offered, the company are bound to accept it, when does the contract of insurance commence? It commences at the time when the premium is offered, because in this case tender would be as good as payment. There is no insurance before that, but only a contract to the effect, “If you will offer the premium we will insure”. The only consideration any one can suggest for this contract is the trouble the man takes to bring his money. What then happens with regard to any previous examination or declaration of health, neither of which is material unless the company insist upon it. This is material, that the person to be insured should not conceal any material fact, and that his statements, if he makes any, should be correct. In this case the declaration was a representation which was true at the time it was made. In insurance law that is not the material time, but the material time is the moment when the insurance is made, and the representations ought to be true then. If there has been a material change there ought to be an alteration of the representation, and the ground for entering into the contract is altered. In this case the ground of the contract to give an insurance being changed, it was not binding on the society at the time of the tender of the premium, and they had a right to say “the circumstances are altered, therefore we will not insure,” even though, if the circumstances had not been altered, they would have been bound by their contract. It seems to me, therefore, that the appeal fails. In my opinion, however, the real ground for our decision is that the negotiations before the time when the policy is effected are mere statements of intention, and that till the insurance company accept the premium they have a right to decline to accept the risk.’

Lindley LJ:

‘This action is for damages for breach of a contract to grant a policy on the life of Canning, and the question is whether the Sun Office was bound to issue a policy. This turns, it appears to me, on the question whether the office was bound to accept the premium which was tendered during the lifetime of Canning. It is said the office was so bound by contract, and we have to investigate this and see how it is made out. On 8 December Canning sent a proposal to the office. In that there was nothing about the premium that would be payable; with that document was a declaration of the truth of certain statements made by Canning, which was to be the basis of the contract…On 14 December the office made a communication to Canning, through Walters, that his proposal had been accepted subject to payment of a certain premium. I pause here for a moment to consider the effect of these negotiations. It was urged on the part of the plaintiff that there was then a complete contract binding the office on payment or tender of the premium to issue a policy of insurance. It is true that there had been an acceptance of Canning’s offer, but he had not at this time assented to the company’s terms; and until he assented to them there was no contract binding the company. The company’s acceptance of Canning’s offer was not a contract but a counter offer. Subsequently the premium was tendered, and I think there would be considerable difficulty, if there had been no change in the risk, in saying that the company, under such circumstances, might decline to accept the premium and issue the policy. In the case supposed the counter offer would be a continuing offer; the tender would be an acceptance of it, and the company would be bound to issue the policy. But the case supposed is not the case we have to deal with here, because another element is introduced by reason of the material change in the risk in the interval between what I have called the counter offer and the tender of the premium. If Canning had tendered the money and had not informed the office of the alteration in the character of the risk, he would have been attempting to take advantage of an offer intended to cover one risk in order to make it cover another risk not known to the office. In other words, if he had paid the money without disclosing to the office the fact that his statements, which were true when he made them, were so no longer, he would have done that which would have been plainly dishonest. But that was not done — the alteration was disclosed, and the company refused to take the risk. I think they were perfectly justified in so refusing. It comes to this: there was no contract before the tender; and the risk being changed the company’s offer could not fairly be regarded as a continuing offer which Canning was entitled to accept. His tender was in truth a new offer for a new risk which the company were at liberty to decline. It appears to me, therefore, that this action fails, and the appeal ought to be dismissed.’

‘When the policy has been delivered the contract is as binding on the insurer as if the premium had been paid, although it has not in fact been paid’ (Insurance Act, R.S.A. 1980, c. 1–5 (Alberta), s 208(1))

Contreras J:

‘Our express recognition of the negligent delay theory is in accord with and justified by the precepts of individual consumer protection and the public interest. Because insurance companies are licensed and regulated by the state, they are part of an industry which is affected by the public interest…As a result, they can and should be held to a broader legal responsibility than are parties to purely private contracts. This is especially true in cases where the insurance carriers have solicited and obtained an application for insurance, and have received payment of a premium…

In addition, and since insurance companies unilaterally prepare the applications and set forth the conditions for acceptance, the parties are not in an equal bargaining position. There must, in all fairness, be some degree of correlative consumer protection. We are of the opinion that an insurance company which retains an application for medical insurance that does not contain a provision as to the time within which the application must be acted upon, and also retains payment of a premium, may be held liable in damages if it fails to either accept or reject the application within a reasonable period of time. It is generally the rule that the determination of what constitutes a reasonable time is a question for the jury…’

Stoker J:

‘Although an insurer is granted a reasonable time to accept or reject an application, a period of 90 days is not a reasonable time. Since the insurer did not issue or reject the policy within a reasonable period of time, the insurer is estopped from denying coverage on the ground that the policy was not issued until after the insured’s death. It would be inequitable to allow the insurer to receive, retain, and enjoy the benefits of premiums for a burial insurance policy, without issuing the policy, and then allow the insurer to deny coverage once the insured dies.’

Sullivan J:

‘In Ransom [Ransom v Penn Mutual Life Ins Co 274 P2d 633 (1954)] we recognised that an ordinary person who pays the premium at the time he applies for insurance is justified in assuming that payment will bring immediate protection, regardless of whether or not the insurer ultimately decides to accept the risk. Subsequent cases have held the layman’s expectation of complete and immediate coverage upon payment of the premium to be so strong that if the insurer wishes to avoid its obligation of providing such protection it must not only use clear and unequivocal language evidencing its intent to limit temporary coverage pending its approval of the policy, but must also call such limiting condition to the attention of the applicant. In the absence of proof by the insurer that it satisfied both of these requirements, courts have held that the coverage provided under a temporary contract of insurance “is that which the ordinary layman, acting in the ordinary course of business, reasonably may expect by virtue of that transaction…” — namely, complete and immediate coverage upon payment of the premium. (Wernecke v Pacific Fidelity Life Ins Co 238 Cal App2d at p 887)

…When, therefore, as in the case at bench, a contract of temporary insurance arises upon the insurer’s receipt of an application for insurance together with the first premium payment, the expectation of the applicant thereby given recognition actually emerges from two conjoined acts — his signing of the application and his payment of the premium. In the words of Ransom “such a person would assume that he was getting immediate insurance for his money…” (at 635) This reasonable expectation on the part of the applicant would, in our view, extend to a continuance of such coverage until the insurer had nullified the two factors responsible for its existence — the application for the policy by rejection and notice of rejection, and the payment of premium by a refund of it. Unless the insurer “manifest(s) this intention (to refuse permanent coverage) by the return of the premium within a reasonable time,…the applicant could assume that his insurance was effective.” (Reck v Prudential Ins Co of America, 184 A. 777, 778…) A rule requiring that such temporary insurance can be terminated only by notice of rejection and refund of the premium appears to us to be not only logical but fair. It at once eliminates uncertainty as to coverage and controversy as to effective notice of rejection. When the insurer notifies the applicant of the rejection of his application but does not refund his premium, its action is uncertain and confusing. On the one hand, the notice of rejection indicates that the permanent policy the applicant requested will not be issued; on the other, the retention of the premium indicates that “(the) immediate insurance (he was getting) for his money” (Ransom, above at p 635) is still continuing. This uncertainty in which the applicant finds himself can be dissolved by conditioning termination on both notice of rejection and refund of premium. Such a rule will at the same time go far in eliminating risk of unfairness to the applicant where the circumstances surrounding the rejection of his application and notification thereof to him are disputed.

Our decision to adopt this rule is fortified by the consideration recognized in Ransom that it is unconscionable for an insurance company to hold premiums without providing coverage.’ [Footnotes omitted]

‘Subject to the provisions of any statute, a contract of marine insurance is inadmissible in evidence unless it is embodies in a marine policy in accordance with this Act. The policy may be executed and issued either at the time when the contract is concluded, or afterwards.’

‘All the terms and conditions of a contract of insurance shall be set out in full in the policy or by writing securely attached to it when issued, and unless so set out no term of the contract or condition, stipulation, warranty or proviso modifying or impairing its effect is valid or admissible in evidence to the prejudice of the insured or any beneficiary.’

‘where the subject-matter is insured “lost or not lost”, the assured may recover although he may not have acquired his interest until after the loss, unless at the time of effecting the contract of insurance the assured was aware of the loss, and the insurer was not.’

Slade LJ:

‘First, there must be common intention in regard to the particular provisions of the agreement in question, together with some outward expression of accord. Secondly, this common intention must continue up to the time of execution of the instrument. Thirdly, there must be clear evidence that the instrument as executed does not accurately represent the true agreement of the parties at the time of its execution. Fourthly, it must be shown that the instrument, if rectified as claimed, would accurately represent the true agreement of the parties at that time’