Insurance cover is a contract between someone who requires cover against a particular risk and the insurance company providing that cover. Insurance is used where a person does not want to accept all of the risk flowing from a particular event. Insurance allows some or all of a risk to be passed on to another party, who for a monetary amount, is prepared to accept a particular risk. Insurance is therefore an effective mechanism for transferring risk to parties who are comfortable accepting particular types of risk.
Insurance differs from other contracts in that people may not obtain cover unless they can show that they have an insurable interest. This is an interest that can be recognised by law and may exist in connection with an individual, a property or a legal liability. The interest does not have to involve ownership, but if individuals can show that they will suffer some form of damage, detriment or prejudice if the event occurs, then they would be considered to have an insurable interest.
The insurance contract is made between a party seeking insurance cover (the insured), and a party providing that cover (the insurer). The consideration paid to the insurer for accepting the risk is known as the premium. The benefit to the insured is usually the payment of a sum of money if the specific event, the subject of the insurance, occurs.
General insurance can be broadly divided into two categories: short-tail and long-tail business. These categories reflect the time between accepting the business and the possible occurrence or settlement of a claim. For short-tail business, the period is generally less than a year, and for long-tail business, it can be significantly longer. It is likely that risks to be insured by an alliancing project would be both short and long tail.
Two key concepts for the effectiveness of insurance are the duty of good faith and the duty to disclose (primarily an obligation of the insured).
The duty of good faith is an implied term in every general insurance contract in Australia, under section 13 of the Insurance Contracts Act 1984 (Cwlth). The duty exists from the pre-insurance contract to the post-insurance contract stage with an insurance policy, including making and handling claims. This means that agencies and service providers (the insured) are required to act towards insurers with the utmost good faith. Failure to do this may result in an insurer's liability for a claim being avoided or reduced. The Insurance Contracts Act allows for damages for breaches of the duty of good faith and the right to cancel an insurance contract following a breach.
The Insurance Contracts Act also gives insured parties a duty to disclose all information relevant to an insurer's decision to accept the risk. Therefore, before a party enters into an insurance contract with an insurer they must fully disclose to the insurer every matter that is relevant to the insurer's decision to accept the risk being insured against.