1. The purpose of the cover note
A proposal is not necessarily accepted at once, since the insurance company may take time to consider it. If the proposal is submitted through an agent, the agent usually has no authority to accept it himself, but must forward it to the insurers in order that they may decide whether to accept it or not. There is, therefore, as a rule an interval of time between the making of the proposal and the final decision, so it is the practice of insurance companies in the case of some types of insurance especially motor, burglary and fire insurance to give the proposer protection by the issue of a ‘cover note’. Cover notes are not issued in life insurance.
The purpose of a cover note in motor insurance is well explained by Pearson J, in Julien Praet et Cie, S/A v H G Poland Lts, where he pointed out that a number of developments or adaptations of the traditional Lloyd’s practice or pattern of business had taken place in response to the requirements of foreign insurance business, motor insurance business, and especially foreign motor insurance business. He said that traditionally the underwriter of a syndicate sat in his box in the underwriting room at Lloyd’s, and a Lloyd’s broker, who had prepared the proposed policy, presented a ‘slip’ giving details of the proposed risk to the underwriter, and the underwriter, if he found the risk acceptable, insured it by initialing the slip. A policy was then prepared and issued. The Lloyd’s broker was the agent of the assured. The underwriter dealt only with the Lloyd’s broker and not with any outside broker, nor with the assured. This procedure, if it had to be maintained in its full rigour without relaxation or modification, would impede foreign insurance business, and would make motor insurance business impossible. He went on to say:
‘The typical motorist is an impatient person in the sense that, having bought a car, he wishes to take delivery and drive off in it at office, and he would not be willing to wait for the traditional steps to be taken at Lloyd’s before he could obtain cover. Therefore, even in United Kingdom, there has to be the familiar system of the cover note, which is issued at once on receipt of a proposal, and covers the assured and puts the underwriters on risk for the period while the proposal is being considered and until a policy is either granted or refused.
He then said that great care was taken, however, to comply with the requirements of Lloyd’s. The authority to issue cover notes was applied for and granted through a Lloyd’s broker, and the proposals were sent to him and presented by him to the underwriter, and he received the policy from the underwriter and sent it to the assured as his agent. The underwriter looked to the Lloyd’s broker for the premium, and had his account with a Lloyd’s broker. The main insurance was duly granted at Lloyd’s and the preliminary cover note, which was inevitably granted outside Lloyd’s by a person acting as agent for the underwriter, was regarded as merely an incidental or ancillary matter.
He continued:
‘In case of foreign motor insurance business, the practice is similar in principle, but the ‘coverholder’, as he is called, has to have a more extensive range of duties and therefore a wider authority from the underwriters to act on their behalf. The coverholder is the person authorized to grant temporary cover so as to bind the underwriters, and the agreement by which he is so authorized is sometimes called a ‘binder’. The coverholder has to do the ‘servicing’ of the policies, and that includes collecting premiums, adjusting premiums, issuing indorsements, receiving claims, settling the smaller claims and referring larger claims to assessors.’
2. The form of the cover note and its issue
The cover note is, in practice, printed in common form; it is usually signed on behalf of the insurance company by the agent through whom the proposal was submitted, and issued by him to the proposer.
If the agent is entrusted with a number of cover notes in blank, to be filled up and issued by him when required, he has authority to give cover and the issue of a cover note binds the company. In this case the company may be bound, even though the cover note is not in the precise form required by the agent’s instructions, provided that the variance is technical only, and does not relate to matters of substance.
In many cases he agent is not entrusted with cover notes in blank; but on each occasion when a proposal form is received from him, the company sends him a cover note with instructions to sign it and issue it to proposer. The agent’s authority is then limited to the particular cover note; he has then no general authority to grant cover.
No formal document is, however, necessary, to bind the company. Cover may be given informally, as, for instance, by letter from the head office. Even verbal cover is sufficient, and the verbal cover may be given by the agent submitting the proposal, if his authority extends thus far.
There may be a further interval of time between the acceptance of the proposal and the issue of the policy. By the terms of the acceptance the proposer may be given cover in express words pending the issue of the policy. This does not affect the legal position, since, on intimating the acceptance to the proposer, the insurance company becomes finally bound.
3. The duration of the cover note
The question of the duration of the cover note is of little importance where the proposal is accepted, since the cover note comes to an end when the policy is issued. It is only where the proposal is not accepted that the question becomes important.
Where the cover note provides that it is to remain in force until the insurers intimate that they have rejected the proposal, no difficulty arises as to the period during which it is current, since it remains in force until the rejection is brought to the knowledge of the proposer.
Where, however, as is usually the case, the cover note is expressly stated to be in force for a fixed period, it does not follow, as a matter of course, that it remains in force during the whole of that period, since the insurers may reserve the right to determine it at an earlier date by intimating their rejection of the proposal.
Nor does it necessarily cease to be in force when the specified period has expired, since the effect of its issue may have been to impose on the insurers certain duties towards the proposer, which they must discharge before they are exonerated from further liability. It is therefore necessary to consider the terms in which the particular cover note is framed.
Where the cover note imposes upon the insurers the obligation of intimating the rejection of the proposal, it remains in force until they have done so. It is not sufficient that they have decided to reject the proposal, nor, in the absence of an express condition to that effect, that they have posted a letter intimating the rejection. They must bring home to the proposer the knowledge of the rejection, and unless they can do this, they remain liable for any loss sustained by him. It is immaterial that the proposal never came to their knowledge, owing to the failure of their agent to transmit it to them, or that their agent failed to transmit the rejection to the proposer.
Where the cover note provides not only that the insurers are to intimate their rejection of the proposal, but also that any deposit paid by the proposer is to be returned to him, subject to a deduction in respect of the days during which the cover note has been operative the insurers remain liable until they have fully discharged their obligation. Even where they have intimated their rejection of the proposal, they remain bound to the proposer, unless and until they have repaid him the balance of his deposit, in accordance with the terms of the cover.
Where the cover note expressly provides that the insurers are to intimate their acceptance of the proposal, or that the proposed insurance is not to bind them until a policy is issued, the cover note will cease to have any force at the expiration of the specified period, unless such acceptance has been intimated, or unless the policy has been issued, as the case may be.
Usually a cover note expressly states the period for which it is to be in force, e g ‘the insurance is provisionally held in force for 14 days from noon, January 1, 1986’. But where the period is not expressly so defined, difficulities may arise.
Thus, in Cartwright v McCormack (Trafalgar Insurance Co Ltd, Third Party);
The insurance company had issued a temporary cover note granting the insured comprehensive motor insurance. He was involved in a road accident at 5.45 pm on December 17, 1959, and the question was whether the company was bound to indemnify him in respect of the damages which he had had to pay to a motor-cyclist who has been injured. The cover note contained a column entitled ‘Effective Time and Date of Commencement of Risk’. Under the column ‘Time’ was written ’11.45 am’, and under the column ‘Date’ was written ‘2.12.59’ . Another part of the note contained the words ‘This cover note is only valid for 15 days from the commencement of risk’. Also included in the note was a statement that ‘Under no circumstances is the time and commencement of risk to be prior to the actual time of issue of the cover note.’ The insurance company contended that it was not liable because the period for which the note had been issued had expired, i e that the period started at 11.45 am on December 2, and expired at 11.45 am on December 17, six hours before the accident happened.
Held, by the Court of Appeal, that the time did not begin to run until midnight of December 2, and that consequently, the insured was entitled to be indemnified.
Harman LJ, said that the time of 11.45 am was inserted to protect the company until that hour of the day, showing that it was not at risk until that time. The duration of the company’s liability was expressed as 15 days from the commencement date. It was not 15 days from the commencement of the risk. The risk ran from 11.45 am, but the date of commencement was December 2. The note therefore expired 15 days from December 2, and those words excluded the first date began at midnight.
4. The effect of the cover note
The cover note is in itself a contract of insurance, governing the rights and liabilities of the parties in the event of a loss taking place during its currency. The assured is, therefore, entitled to enforce the contract contained in the cover note, provided that has compiled with its conditions, e g as to payment of the premium.
5. The incorporation of the terms of the policy
The cover note itself may contain no terms at all, but usually it incorporates the conditions of the company’s policy, e g as in Queen Insurance Co v Parsons, where the cover note stated that the proposer ‘had proposed to effect an insurance against fire, subject to all the usual terms and conditions of this company’.
Sometimes the cover note incorporates the terms of the policy not by referring to them directly but by referring to the proposal form which itself alludes to them.
The insurance company may also rely on the terms and conditions of the policy if it can be shown that the assured knew of them, or to have had the opportunity of knowing them, and to have agreed to be bound by them.
On the other hand, as against the insurers, the cover note is to be constructed with reference to the common form of policy issued by them, and they cannot rely upon a construction of the cover note inconsistent therewith.
6. Replacement of the cover note by a policy
Normally the cover note will be replaced in due course by a policy, but the insurance company is not bound to issue one, unless there is an agreement to the effect.
The assured, too, is not bound to accept the policy. ‘During that month it was open to the (company) on further inquiry to refuse to grant the policy and to terminate the contract at the end of the month. It was equally open to the assured to say that he did not like the (company), not thinking the capital sufficient, or for other reasons.’
7. Broker’s cover note
Where the insurance is effected through a broker, the broker, pending the preparation of the policy, issues a broker’s cover note, certifying that the insurance has been effected and setting out its terms.
By issuing the cover note, the broker does not incur liability on the insurance, since he does not purport to be an insurer. But he is to be presumed to warrant to the proposer that his instructions have been properly carried out, and that the insurance has been effected, If, therefore, there is no insurance in fact, he will be liable for breach of the warranty. Such a cover note is not binding on the insurers.