The status of the slip and how it relates to insurance policy

Introduction

This essay will consider section 22 of the Marine Insurance Act 1906 and, taking into account the decision in HIH Casualty & General Insurance v New Hampshire [1] and the Law Commission’s recent reports [2] , will consider whether the section still provides a statement of applicable law. In order to fully consider this issue, the status of the slip and how it relates to the insurance policy as a whole will also be briefly examined.

Purpose and Origins of Section 22

The Marine Insurance Act 1906 is the main UK statute regulating insurance policies. As the name suggests it applies particularly to policies of a marine nature but is also a key Act for many other insurance policies. What makes this Act important, not just to English contracts but around the world, stems from the wide use of English law around the world in marine insurance matters. It is usual to see marine insurance contracts, between two international parties, stipulate that their agreement will use English law and arbitration. Despite this importance in global trade the Act itself has attracted more and more criticism and is currently under review by the Law Commission to see how it can be improved to match the modern world of insurance. The majority of these criticisms stem from the age of the Act. The Act was passed into law over 100 years ago and many sections are not applicable in modern society [3] . However, an extensive discussion of all the flaws of the Act is not appropriate here and for the purposes of this discussion we will focus on the problems caused by section 22.

Section 22 of the Marine Insurance Act 1906 reads as follows:

“Subject to the provisions of any statute, a contract of marine insurance is inadmissible in evidence unless it is embodied 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." [4] 

This section is a relatively straightforward provision but has wide ranging implications in the law and has caused several problems to the market. The provision states that any contract of marine insurance must be in a marine policy (in accordance with the Act), or it is inadmissible. If the policy is inadmissible then an assured cannot prove that there was a contract and therefore will not have a claim. This section seems to impose a mere technicality on the relationship between the assured and insured, but one that could have disastrous effects for the assured.

Before we continue to examine the impact the section has had, let us first consider why the provision was considered necessary in the early 20th century. The section initially seemed to be a way to prevent tax evasion. The Stamp Act 1875 imposed a stamp duty on all marine insurance policies [5] . In order to prevent people evading the duty by not using a policy, the Act goes on to state that if the policy has not been stamped then it will be “null and void to all Intents and Purposes whatever." [6] Section 22 of the Marine Insurance Act seems to stem from these provision relating to a stamp duty on marine insurance policies. In 1970, this stamp duty was finally abolished in full by the Finance Act 1970. Despite this, section 22 Marine Insurance Act 1906 remains on the statute books, seemingly as a mere technicality.

Impact of Section 22 on the Insurance Market

Let us now move on to consider how the market has been affected by the section and how it has adapted to accommodate this technicality. To understand the impact we must first briefly consider how the market works in practice, especially in relation to ‘slips’ and ‘policies’, both of which are mentioned in the Marine Insurance Act, yet are not defined.

The London market has a practice of issuing an informal document detailing the main terms of the agreement between insurer and insured. These documents are known as 'slips' and precede the policy itself. The intention of the slip is to outline the terms of the insurance so both parties are clear on the contract, and their obligations and cover, before the formal policy is drawn up. The problem arises when no policy actually follows the slip. What then is the legal status of the slip and, indeed, the contract? If section 22 is to be followed strictly there is no insurance contract as the marine insurance was not contained in a policy and the slip cannot establish the contract in the absence of a policy. It should be noted that actions have been brought on the slip in other types of insurance, such as fire insurance [7] .

Professor Bennett makes an interesting observation on the way the market works, stating:

“The market understanding has always been that the underwriter is bound from the moment he initials the slip, even in the absence of a policy. However, the law, driven principally by stamp duty legislation, and commercial practice, adhering obdurately to market tradition, have not always coincided." [8] 

Here, Bennett points out that due to section 22, the legal framework has fallen out of sync with the commercial reality in the London market. Bennett's observation is an excellent observation in how the London market works and is key to understanding how the market deals with the requirements of section 22. As the Law Commission state in their paper on the matter, section 22 seems to have little effect in practice [9] . The conclusions of the Law Commission seems identical to those of many academics, Bennett included. In practice insurers will, and often do, pay out claims regardless of whether a written policy was present. The main problem the section now causes in the modern insurance market is the possibility that an insurer could refuse to pay out on a claim where no formal policy was issued and invoke section 22. If we follow the Act strictly, this would be a perfectly legal action and the insurer would be well within their legal rights to do so.

Decision in HIH

In the case of HIH Casualty & General Insurance v New Hampshire [10] , Lord Justice Rix examined the issue of whether the policy superseded the slip or whether they should be read together. This becomes of particular importance where there is inconsistency between the two documents, a not uncommon problem. Lord Justice Rix stated that the distinguishing fact between this case and the previous precedents on the matter, Youell v Bland Welch & Co Ltd [11] and Punjab National Bank v de Boinville [12] , was that in HIH, the issue was whether the policy was ever agreed to. In the above it had been acknowledged that the parties had agreed to the policy and therefore, that agreement was deemed to supersede the slip.

Lord Justice Rix summarises this point quite concisely, and therefore we will examine his judgement closely. Lord Justice Rix held:

“there is nothing in these citations which binds this court to rule that where a prior contract has been followed by a further contract, or where in an insurance context a slip contract has been followed by a policy...

...That is because all passages in prior cases in this court are only obiter dicta." [13]  

Here, Lord Justice Rix points out the relevant statements in the previous cases were only obiter dicta and therefore, not binding on his judgment. However, he does give them the full consideration a judicial opinion deserves.

Moreover, in Youell v Bland Welch and Punjab National Bank v de Boinville, it was common ground that the policies in question were intended to supersede the slips. Where it is common ground that one contract has been intended to supersede an earlier contract, it must follow that the parties' contract must be found exclusively in the later contract. Thus the earlier contract cannot be used to add to, or modify, the later contract." [14] 

Here Lord Justice Rix explains why he agrees with the previous cases but disagrees in the scenario. The key part of the distinction, as mentioned above, is that the parties had agreed to the policy and therefore it seems logical that the policy was where they expected their contract to be held. He then goes on to discuss how the situation would work where there is no common ground to supersede the original slip with a policy. [15] He begins by stating that in this circumstance he “do[es] not see how it can ever be permissible to exclude reference to the earlier contract. I do not see how the relationship of the two contracts can be decided without considering both of them." [16] The problems with using the older case law are then discussed. The law relating to slips has considerably evolved since the turn of the 20th century and therefore any case law from this time would be of limited use [17] .

How applicable is section 22 to modern law?

In light of the Law Commissions criticisms of section 22, the current commercial reality and the decision in HIH, what legal effect, if any, does section 22 hold? It is clear that the original justification for section 22 no longer exists since the stamp duty was abolished. Since then it seems that no other justification for keeping the section has been advanced.

The main argument for section 22 not having legal effect is the commercial reality of the market. In reality the London market often only issue slips and yet still pay out on the contracts even with the absence of a written policy. When this is considered alongside the decision in HIH, which essentially gives more legal authority to basing contracts on the slip, then section 22 becomes increasingly unnecessary.

The issue still remains than an insurer can technically refuse to pay out a contract due to the lack of written policy. The legal status of this has yet to be challenged but I suspect, based on the above, a court will try to prevent this. It seems clear that section 22 still holds little effect and there is a strong case for its repeal.