A contract is a legally binding agreement between two or more parties where there exists a promise by the parties to do something in return for something of value. It is a fundamental principle of contract law that each side discloses all pertinent facts and information to the other so that the parties can make an informed decision before entering into a contract. Each side must show good faith to the other.
Contracts go to the very heart of commercial as well as domestic legal arrangements. A classic example being a contract for house insurance. A premium is paid to the insurance company and they issue a policy of insurance. By issuing the policy the insurer is contracting with the policyholder that they promise to cover any loss or damage caused to the house which is provided for in the terms and conditions of the policy. Insurers are effectively speculating whether or not there is a risk that their insurance policy will be called upon for an insured peril. To arrive at a decision to issue a policy and the premium to be charged insurers will seek answers to various relevant questions by way of a proposal form. The answers supplied by the householder determine if a policy will be issued and for what level of premium. The obligation to disclose all matters relevant to the risk falls on the householder. This is especially relevant to online insurance. It is the person seeking the insurance who knows the risk they wish to insure better than the insurer.
Prior to the inception of the policy the duty of disclosure falls on the proposer of insurance (insurer). However, there are instances when the large multinational insurance companies will have information on the risk not necessarily within the knowledge of the person seeking the insurance. Big data analytics is a modern risk management tool employed to show trends in the various insurance product lines. Such trends can be the fluctuating value of properties and the rebuild costs in various areas of the country. An important statistic relevant to household insurance which contain an element of cover for buildings and an element of cover for contents. The buildings cover will be a figure for the costs of replacing all or part of the property should an event occur which causes irreparable damage to the property. The crucial part of household insurance is to get the right level of cover. Just because a house is worth €500,000 is does not necessarily follow that the buildings cover is required for this amount. All too often the rebuild cost will be a lot less, possibly up to half of the value of the house. In this case the insurer will only pay the rebuild costs provided at the level of cover of the policy will allow. They will not pay the value of the house despite the fact that the cover might have been for that higher value and the premium calculated (and subsequently paid) was based on the value of the house the policyholder proposed. Households in such a scenario are over insured. Insurers should try to prevent this by providing a health warning outlining that buildings cover should be for the rebuild cost of a property and not for the market value of the property. The insurer has a duty of good faith to the policyholder to bring this fact to their attention when the policy is being incepted, if they don’t the duty of good faith is called into question and argument can be made that the insurer is knowingly charging an incorrect premium.
Insurers must also abide by the Central Bank of Ireland consumer protection code 2012 by dispensing fair treatment to their customers.