insurance law

DEFINITIONAL PROBLEM

What is insurance?  Insurance is a contract

There must be a contractual relationship between insurer and insured.

Premium – this is the consideration that passes from the insured to the insurer.

Uncertainty – there must be uncertainty – Prudential Assurance & Inland Revenue Commissioner.  It is not possible ordinarily to insure a certainty.

Negligence:  - it is not possible to effect cover if we know liability arising will be arising

Control- parties must not be in a position to control the insurable event.

Insurable Interest: traditionally it had to have a pecuniary dimension but not any more.

Risk:   a chance or probability of loss, what is expected or hoped for.

Peril: - cause of loss

Hazard – condition that increase or reduce chance of loss arising.

Risk is what insurance addresses.

1.                  financial risk;

2.                  Dynamic Risk and Static Risk – dynamic risks in the short term are losses but in the long term they are benefits.

3.                  fundamental risks/

4.                  Pure risk/Speculative        

It has been observed that the contract of insurance is basically governed by the rules which form part of the general law of contract.   But equally there is no doubt that over the years it has attracted many principles of its own to such extent that it is perfectly proper speak of a law of insurance.

In the words of Collinvaux in his book ‘Law of Insurance’ at page 2 he says    insurance contracts also exhibit certain features which as a matter of common law apply only to them.  Historically statutes dealing with the regulation of insurance business have not attempted to define the contract of insurance to obviate the danger of excluding contracts that should be within their scope.  However a definition is essential on account that insurance business is closely regulated.

In the words of Ivamy “General Principles of Insurance Law” at page 3 “a contract of insurance in the widest sense of the term may be defined as a contract whereby one person called the insurer undertakes in return for the agreed consideration called the premium to pay to another person called the assured a sum of money or its equivalent on the happening of a specified event.”

According to John Birds in Modern Insurance Law Page 13 it is suggested that a contract of insurance is any contract whereby one party assumes the risk of an uncertain event which is not within his control happening at a future time in which event the other party has an interest and under which contract the first party is bound to pay money or provide its equivalent if the uncertain event occurs.”

In the words of Channel J.  In a case of Prudential Assurance Company Ltd v. Inland Revenue Commissioner [1904] 2.K.B. 658

Page 663 “a contract of insurance then must be a contract for the payment of a sum of money or some corresponding benefit such as the rebuilding of a house, or the repairing of a ship, to become due on the happening of an event which event must have some amount of uncertainty about it and must be of a character more or less adverse to the interest of the person effecting the insurance.  … it must be a contract whereby for some consideration usually but not necessarily for periodical payment called premiums you secure to yourself some benefit usually but not necessarily the payment of a sum of money upon the happening of some event.”

IN the words of Lord Clark  in the case of Scottish Amicable Heritage Securities  Association  Ltd V. Northern Assurance Co. [1883] 11R 287

1.         CONTROL

It is a contract belonging to a very ordinary class by which the insurer undertakes in consideration of the payment of an estimated equivalent before hand to make up to the assured any loss he may sustain by the occurrence of an uncertain contingency”

For a contract of insurance to exist there must be a binding agreement under which the insurer is legally bound to compensate the other party or pay the sum assured.  The parties to an insurance contract are the insurer and the insured.

2.         Premium

This is the consideration that passes between the parties to support the transaction.  It is we asserted that premium is the consideration which the insurers receive from the insured in exchange for their undertaking to pay the sum insured if the event insured against occurs.  Any consideration sufficient to support a simple contract may constitute the premium in a contract of insurance.

3.                              uncertainty

The insurance contract is aleatory or speculative it is also contingent as it deals with uncertain future events.  It must be characterised by some uncertainty.  In the words of Channel J. in Prudential Assurance Co. V Revenue Commissioner page 663 the judge says “then the next thing that is necessary is that the event should be one which involves some amount of uncertainty.  There must be either some uncertainty whether the event will ever happen or not. Or if the event is one which must happen at some time or another there must be uncertainty as to the time at which it will happen.”

4.                  Insurable Interest:

The insurable event must be of an adverse nature.  The insured must have an insurable interest in the subject matter of insurance.  This is the financial or pecuniary interest which is at stake or in danger if the subject matter is not insured.  Insurable interests is a basic requirement  of the contract of insurance.

5.         Control

The event insured against must be beyond the control of the party assuming the risk.  Refer to Re Sentinel Securities PLC [1996]1 W.L.R. 316

6.         Accidental or Negligent Loss

Insurance can only be effected in circumstances in which loss is accidental in nature or is a consequence of a negligent act or omission.  Loss occasioned by intentional acts does not qualify for indemnity or payment of the sum assured.

7.         Risk

Ordinarily risk is understood to mean that in a given situation there is uncertainty about the outcome and that a possibility exists that the outcome will be unfavourable.  There is no universally accepted definition of the term risk.  It has been defined as the chance of loss, the probability of loss, the probability of any outcome different from the one expected.  It is a condition in which a possibility of loss exists. 

Generally risk is a condition in which there is a possibility of an adverse deviation from a desired outcome.  For personal purposes, risk is measured by the probability of loss in that the person hopes that loss will not occur.  But the probability of loss exists and this is used to measure the risk.

The larger the number of exposure units the more predictable the probability of loss.  The standard deviation is used to measure the risk.  The higher the probability of loss, the greater the risk.  As the greater the probability of loss the greater the probability of a deviation from what is expected or hoped for.

Risk differs from peril and hazard in that whereas peril is a cause of loss, hazard is a condition which may create or increase the chance of loss from a given peril.

Types of or Classification of Risk

1.                  Financial and non-financial: - a risk is financial if the adversity involves a financial loss that is monetary.  It is non-financial if the loss is not of a pecuniary nature.

2.                  Dynamic and Static:  dynamic risks are those resulting from changes in the economy for example price levels, income consumer tastes, technological changes etc.  These changes may occasion loss to individuals or to persons.  However in the long term they benefit society as they are a consequence of adjustment to misallocation of resources.  These risks are less predictable and affect large segments of the society.  Static risks involve losses which could have occurred whether or not there were changes in the economy.  They arise from causes other than the economy e.g. perils of nature or natural perils, dishonesty etc. the society does not benefit from these risks in any way.  However they are generally predictable.

3.                  Fundamental and Particular Risks:  Fundamental risks involve losses that are impersonal in origin and consequence.  They are group risks occasioned by economic social and political phenomena and affects large segments of the population.  The society is generally responsible i.e. no single individual can cushion society against them.  Particular risks involve losses that arise from individual events and are felt by the individual for example theft, destruction of property etc.

4.                  Pure and Speculative Risks:  Pure risks refer to circumstances which involve the chance of loss and no possibility of gain while speculative risks describes circumstances in which there is a possibility of loss and gain.  In speculative risks there is a deliberate assumption of risk. They are not insurable.

TYPES OF PURE RISKS

(a)    Personal Risk:  This is the possibility of loss to the individual as a consequence of a peril or event insured against for example premature death, old age, disability etc.

(b)   Property Risk:  This is risk borne by persons who have proprietary interest as the same may be lost or destroyed.  This risk encompasses direct and consequential or indirect loss.

(c)    Liability Risk: The basic peril is the unintentional injury to a person or damage to their property through negligence or carelessness.  It involves the possibility of loss of present or future income by reason of unintentional or careless acts or omission of others;

(d)   Risks arising from failure of others:  This is the possibility of loss by reason or failure of other parties to fulfil their obligations for example within the required time.

METHODS OF HANDLING RISK

 Risk Avoidance

This is the refusal by a person to accept risk.  It is accomplished by disengaging in activities or ventures that give rise to risk.  It is a negative method of handling risk

Risk Retention

This is the most common method of risk management where a person with or without knowledge of the risk takes no positive step to address the same.  Voluntary retention .This is characterised by the recognition that risk exists and a tacit agreement to assume any loss arising.  Involuntary retention takes place if the individual exposed to the risk is unaware of its existence.

Transfer of Risk

Risk may be transferred from one person to another or others willing to bear the same.  It may be shifted or transferred by contracts under which the other person assumes the other’s probability of loss.  For example insurance is a means of transferring risk as the insured provides consideration and the insurer undertakes to pay the sum assured or indemnify the insured when risk attaches.  Risk transfer may also be effected by hedging which involves a simultaneous purchase and sale of goods for future delivery.

Risk Sharing

Risk may be shared in various ways for example

(i)                 Formation of a company where persons pool their resources with each member bearing only a portion of the risk of failure of the corporation;

(ii)               Insurance as a mechanism involves the sharing of risk as members of a scheme pool their risks;

Risk Reduction

This is the adoption of loss prevention and control problems or measures whose purpose is to reduce loss.  For example alarms, burglar proofs, watchmen etc.

In a wager contract there is a deliberate assumption of risk.

Robertson v. Hamilton  - distinguishes wagering from the contract of risk  a priori

Wilson v. Jones

PARTIES TO THE INSURANCE CONTRACT

Risk continued

Wager

Like insurance, wagering contracts  deal with uncertain future events.  They are speculative in character.  In  a wager parties agree that some consideration is to pass depending on the outcome of some uncertain future event.  Wagering contracts are an unenforceable.  However the fundamental distinction between insurance and wagering contracts is risk.  Whereas in an insurance contract risk exists a priori in a wagering contract there is a deliberate assumption of risk.  In the words of Ellenborough C.J. in the case of Robertson v Hamilton (1811) East 522 the judge says “although insurance and wagering contracts are both speculative contracts risk is of the essence to the insurance contract and the assured or insured is made to effect the insurance contract because of the risk of the loss and does not create the risk of loss by the contract itself.”

In wagering contracts neither of the contracting parties has an interest other than the sum or stake to be won or lost depending on the outcome.  Payment is dependent upon the event as agreed by the parties and is not paid by way of indemnity and neither party suffers loss capable of being indemnified. 

In insurance the insured has an interest in the subject matter in respect of which he may suffer loss.  The uncertain event upon which the contract depends is prima facie adverse to the insured’s interest and insurance is effected so as to meet the loss or detriment which may arise upon the happening of the event.

In the words of Blackburn J.  in Wilson and Jones (1867) L.R. 2 Ex. 139 at 150 the Judge says “I apprehend that the distinction between a policy and a wager is this, a policy is properly speaking a contract to indemnify the insured in respect of some interest which he has against the perils which he contemplates he will be liable to.” 

In a wager or gambling contract the question of indemnity does not arise.  In wagers it is essential that either party win or lose depending on the outcome of he uncertain event.  In insurance, the insured pays a premium to furnish consideration.  It is independent of the event insured against and the insured cannot be called upon to contribute anything more whether or not the event occurs.

Fuji Finance v. Aetna Insurance [1994] 4 All E.R. 1075

D.T. I V. St. Christophers Association [1974] 1 All E.R. 395

Medical Defence Union V. Department of Trade [1979] All E.R. 421

Gould V Curtis [1913] 3 K.B. 84

Hampton v. Toxteth Co-operative Society [1915] Ch.721

Re National Standard Life Assurance Corporation [1918] 1 Ch. 427

PARTIES TO AN INSURANCE CONTRACT

Insurance combines two types of contract.

The insured – person who takes insurance.  The insured must have an insurable interest in the subject matter.   Joel v. Law Union and Crown Insurance Co.  the insured was of unsound mind.  Was the insurer bound to pay the sum assured.  The law does not subject the proposal to any other interest and even an insane person has insurable interest.

The insurance agent procures or solicits business for the company.  At company law the insurance agent is deemed to be the agent of the insured.  If the agent completes the proposal forms for one, then he is an agent of the insured.  In O’connor V.  B.D.B Kirby & Others

Insurance combines first party and third party contracts most non-indemnity contracts (life insurance) are first party while third party contracts are statutory.  Where the insurer is bound to compensate the insured or pay the sum assured.  In either case parties to an insurance contract are invariably the insurer and the insured.

INSURED

This is the person who takes out an insurance policy. He is the person who shifts risk to the insurer and maybe a natural or juristic person.  An insured must have an insurable interest in the subject matter.  Under Section 5(1) of the Marine Insurance Act, every person has an insurable interest who is interested in a marine adventure.

Section 94(1) of the insurance Act provides inter alia no policy of insurance shall be issued on the life or lives of any person or persons or any other event or events whatsoever, wherein the person or persons for whose use, benefit or on whose account such policy or policies shall be made, shall have no insurable interest.”

Arguably the only delimiting factor in insurance is an adverse risk in the subject matter, the question of unsoundness of mind in insurance was considered in Joel V Law Union and Crown Insurance Co. [1908]2. K.B. 863

INSURER

This is the person who undertakes to indemnify the insured or pay the sum assured when risk attaches.  Insurers may be classified as the company brokers or underwriting associations and agents.  The history of insurance practice lays more emphasis on the company as the central undertaking in insurance.  The now repealed insurance companies act manifested this phenomenon. 

Section 22 of the Insurance Act provides that no person shall be registered as an insurer under this Act unless that person is a body corporate incorporated under the Companies Act and at least one third of the controlling interests whether in terms of shares paid up capital or voting rights as the case may be are held by citizens of Kenya.

Under Section 23 (1) the Act specifies the minimum capital requirements for insurance companies.  No person shall be registered as an insurer or if registered shall have his registration renewed unless he has a paid up capital of not less than 50 million shillings.

To carry on insurance business a company must be licensed by the Commissioner of Insurance.   Under Section 2(1) of he Insurance Act a broker is an intermediary concerned with the placing of insurance business with an insured in expectation of payment by way of commission, brokerage, fee allowance, etc.

Broking developed at the Lloyds Coffee House.   Under Section 2(1) of the insurance Act an agent is a person not being a salaried employee of the insurer but who in consideration of a commission solicits or procures insurance business for an insurer or broker.

An insurance agent commits both parties to the transaction.  At common law an insurance agent is deemed to be the agent of the proposer for purposes of completion of the proposal form.  This position is justified on the premise that the proposer controls all the information relating to the subject matter.  Any incorrect statements or any misrepresentation in the proposal form affects the proposer adversely.  However, if the insurance agent acts fraudulently he is deemed to be the insurer’s agent.

Harse v Pearl Life Assurance Co. ltd [1904] 1K.B. 558 – insured had no insurable interest

Hughes v. Liverpool Victoria legal Friendly Society[1916] 2K.B.482 – the agent was fraudulent so the premium was recoverable

Under the provisions of the Insurance Act 1891 Insurance Agents are deemed to be agents of the insurer (English position at the moment)  refer to O connor  V B.D.B Kirby and Another [1917] 2 All E.R. 1415

Facts

The insured who owned a motor vehicle took out an insurance policy through the defendant insurance broker.  He supplied all the information and the broker completed the proposal form.  In response to one question, the proposer stated that he had no garage and that the vehicle would be parked by the side of the road.  The Broker indicated that it would be kept in a garage.  The proposer or insured signed the proposal form and a policy was subsequently issued.  The insured later lodged a claim but the insurer repudiated liability when the mistake came to light.  The insured sued the broker in damages on the ground that the broker had broken his contractual duty to complete the proposal form correctly.

It was held that the broker was not liable for two reasons:

1.                  It is the duty of the proposer for insurance to make sure that the information contained in the proposal form is accurate and should not sign the form if it is inaccurate as it was the insured’s duty to check the entire contents of the form, the sole effective cause of loss was his failure to do so.

2.                  the insured failed to prove that the broker had breached his contractual duty. 

In the words of Davis L.R. at page 1421  “It was the duty of the insured to read this form, it was his application, he signed it and if he was so careless as not to read it properly, then in my opinion he has only himself to blame.” 

However under Section 81(2) of the Insurance Act where an agent or servant of an insurer writes or fills in or has before the appointed date written or filled in any particulars in a proposal for a policy of insurance with an insurer, a policy issued in pursuance of the proposal shall not be avoided by reason only of an incorrect or untrue statement contained in the particulars so written or filled in unless the incorrect or untrue statement was in fact made by the proposer to the agent or servant for the purpose of the proposal and the burden of proving that  the statement was so made shall lie upon the insurer.  To some extent this section modifies the common law position.

NATURE AND OPERATION OF THE INSURANCE MECHANISM

Insurance may be described as a social device whereby a large group of persons through a system of equitable contributions may reduce or eliminate certain measurable risks of economic cost resulting from the accidental occurrence of disastrous events.  Its effect is to spread the cost which normally would fall upon a single person in an equitable manner over the members of a large group exposed to the same hazard.

The theory behind insurance is that members of an insurance scheme contribute to a central fund from which payments are made in case one of their numbers suffers loss by occurrence of the risk insured against.  The payment of individual contributions is the premium.  It has been observed that insurance serves two basic roles namely:-

(a)                The transfer and shifting of risk from an individual to a group;

(b)               The sharing of loss on an equitable basis by members of the group.

These roles constitute the insurance mechanism.  Insurance attempts to shift individual risk to a group and does so equitably should the risk attach  i.e. sharing of loss.  By co-operating individual loss is shared by members of the group.

Insurance may therefore be described as an economic device whereby the individual substitutes a small certain cost for a large and certain financial loss in future which he would have to bear but for the insurance.  In practice the insurance mechanism anticipates the possibility of loss and organises individuals into homogenous groups exposed to the same risk.

Insurance companies generally employ two mechanisms in grouping persons.

(i)                 The law of large numbers, averages or probabilities;

(ii)               Posterior or empirical probabilities.

The law of large numbers is based on the likelihood of an event taking place and makes predictions on the likelihood of such an event happening on the assumption that the happening can be predicted with certainty.  It operates on the theory that the observed frequency of any event approaches the underlined probability as the number of trials approaches infinity.

Under posterior or empirical probabilities actuarial scientists determine the probability of risk attaching by reference to the past and the prevailing circumstances. 

It has been observed that insurance in  its fullest can only exist if the following elements are present.

1.                  A person with an interest in something that can be valued;

2.                  The thing in which he has an interest is subject to loss by a peril;

3.                  a substantial number of other persons have interests in similar things subject to similar perils; 

4.                  the chance of loss from the peril can be measured with some degree of accuracy;

5.                  The desire by enough persons of the group to share each others loss, the loss arising is definite and predictable in financial or pecuniary terms, the loss must be tortious or accidental, the loss must not be catastrophic in aggregate.

6.                  the cost of insurance must be economically feasible.

HISTORICAL DEVELOPMENT OF INSURANCE

The origins of the modern insurance in the practises adopted  by the Italian Merchants from the 14^th century though the concept of insuring is an ancient one, maritime risk, risks of losing ships and cargo led to the practice of medieval insurance which dominated insurance for many years.

The practice of insurance spread to London in the 16^th Century originally there were no separate insurers a group of merchants would agree to bear all risk amongst themselves.  Insurance business in England developed alongside the Royal Exchange of London which was chartered in 1570.

Before its incorporation the exchange was a meeting place for merchants involved in different commercial activities and many bargains were concluded at the venue. With time these merchants realised that every transaction had a risk element and hence the need to cushion themselves.

Marine insurance which is the oldest form of insurance was for many years transacted at the Lloyds Coffee House.  The earliest forms of insurance contracts were known as remission or loans on Bottomry or Bills of Obligatory.  A merchant would borrow money either by a public prescription or privately for the purpose of buying goods on shipment and the loan was payable at a fixed rate of interest if the ship and its cargo arrived safely.  Nothing was payable in the event of loss.

This system of insurance imposed a heavy burden on lenders and was unsatisfactory for commercial purposes.  In marine insurance the practice was that a merchant desiring insurance would pass a slip of paper with the particulars of the ship and its cargo and people willing to accept a portion of the risk would initial the slip and when the total amount of insurance required was underwritten the contract was complete.

For many years the common law played an insignificant role in the regulation of disputes concerning insurance but this changed with the appointment of Lord Justice Mansfield as Chief Justice in mid 18^th Century and by the latter half of the century the jurisdiction of courts over insurance matters had been established.  The principles developed in relation to marine insurance have by and large been applied in other types of insurance. 

Medieval Insurance was closely associated with Banking.  Attempts were however made in the 13^th century to separate the two.  Merchants in Venice and Genoa developed the so called ‘risk carrier’ or bill of surance or assurance which dealt with insurance transactions only.  It operated on the premise that a merchant would pay a specific sum of money in advance and the value of the goods in question was payable to him in the event of their loss or destruction.

In 1574 a Chamber of Surance was established at the law exchange of London.  This was a specialised section to deal with insurance transactions.  By 1575 insurance contracts had been standardised and subject to registration.  This was necessary to prevent fraudulent practices by insurers.  The Chamber of surance and the registration of insurance contracts was formalised by the Francis Bacon Insurance Registration Act 1601.  The statute created a special court to deal with disputes in insurance.  Before 1720 there were minimal attempts to regulate insurance business by statute and insurance was essentially in the hands of individuals and the Lloyds of London.

The South Sea Bubble scam of 1720 revealed the dangers of unregulated business. This led to the enactment of the South Sea Bubble Act and the incorporation of 2 insurance companies i.e. the Law Exchange Assurance Corporation Limited for marine insurance and the London Assurance Corporation for Life Insurance. 

The London fire Assurance Company was incorporated in 1772 after the great London fire.  Thereafter significant attempts were made to regulate insurance business by legislation for example the Marine Insurance Act 1746 addressed marine insurance while the Life Assurance Act 1774 dealt with life insurance.  Development in marine insurance culminated in the codification of the law in the marine insurance Act 1906.

In Kenya the British introduced commercial practices similar to those in Britain when Kenya became a protectorate and English law was made applicable by the reception clause in the orders in council and subsequently by the Judicature Act 1967.  Insurance business in Kenya was introduced by the British and other foreigners who established branches of large insurance companies or acted as agents.  Evidence shows that as early as 1887 an English insurance company had an office in Zanzibar. 

The first insurance office was opened in Kenya in 1891 and by the end of the first world war a number of British Insurance Company had representatives or agencies in Kenya.  However it was not until 1930 that a locally incorporated company joined the market i.e. Pioneer General Assurance Society.   Although insurance activities gained momentum during the 40’s and the 50’s it was exclusively in foreign hands and called for minimal regulation.

However in 1945 the African Life Assurance (Control) Ordinance was promulgated to control insurance services to Africans.   Under this Ordinance insurers were prohibited from extending insurance cover to Africans unless the proposal form had been approved by the District Commissioner.  This ordinance has since been repealed.  The Insurance Companies Act 1960 did not address the question of regulation of the insurance industry.

The Marine Insurance Act was enacted and came into force on November 22 1968.  This Act is a carbon copy of the English Marine Insurance Act 1906.  It generally addresses questions of substantive law.

After independence insurance business prospered and the state demonstrated its desire to participate in the business by forming the Kenya National Assurance Co. in 1965 which dominated Insurance Business for many years. 

In 1972 the Kenya Re Insurance Corporation was established to transact re insurance business.  Regulation of insurance business in Kenya reached its climax in 1984 with the enactment of the Insurance Act Cap 487 which came into force on January 1^st 1987.  The statute was hailed as a landmark in the regulation of the insurance sector. The objective of the Act was to amend and consolidate the law on insurance and to regulate insurance business in Kenya.  It was based or inspired by the English Insurance Companies Act 1982.

The statute was intended to put into place an effective regulatory structure so as to consolidate the mutual good in the sector with a view to making the industry more productive and beneficial to the country.  Some half-hearted attempts were made to Kenyanise the industry.

The most important innovation was the establishment of the office of the Commissioner of Insurance upon which the statute confers draconian powers in the management of the insurance industry.  The statute makes minimal attempts to modify the substantive principles of insurance.  However, it makes provision for solvency margins investment by insurance companies, Kenya Re Insurance Corporation, payment of claims, insurance advisory board.

Under Section 169(1) of the Act the Insurance Appeals Tribunal is established as a specialised court to determine disputes between the commissioner of insurance and the insurance industry.

GENERAL ATTRIBUTES AND TRENDS IN INSURANCE BUSINESS IN KENYA

Insurance is an integral part of commercial processes and develops in the womb of capitalism.  It is a service industry whose object is to promote the broad aims of capitalism as a mode of production.  The insurance industry in Kenya is profit motivated.  Insurance funds are pooled and invested to enhance the profitability of insurance companies. 

The rules and principles which regulate insurance evolve to give effect to the profit maximization objects for example the basic insurance principles of indemnity subrogation, salvage, contribution and apportionment are tailored to ensure that the insurer makes a profit.  The basic rules and principles of insurance evolve as customs and usages of marine insurance and tend to be one sided.  As a consequence of the colonial legacy, there has been heavy leaning towards Britain in terms of insurance practices and the law.

For many years the industry was dominated by English insurance companies for example in 1967 out of 37 companies, 30 were British.  In 1985 out of 43 companies only 20 were locally incorporated.  The scenario has since changed in that the number of locally incorporated companies has increased and so is the quantum of business transacted.

The law and principles of insurance are predominantly non-local for example the Marine Insurance Act cap 390 is a carbon copy of the English Marine Insurance Act 1906.  The Insurance Act Cap 487 is based on the English Insurance Companies Act 1982.

The Insurance Industry tends to be concentrated in urban areas partly due to the colonial legacy of introducing the money economy first in the urban areas and hence the overall development of the economy.  The industry has restricted itself to areas in which the money economy is predominant thereby ignoring the predominant subsistence economy.  Agricultural insurance remains contentious and the minimal business transacted is on experimental basis.  The native population has not been actively involved in the utilisation of insurance services.  This is partly by reason of ignorance and patterns of property ownership.

However at the national level, the insurance industry has contributed enormously.  Statistics show that it accounts for about 20% of the gross national product in terms of revenue.

ROLE OF INSURANCE:

1.                  Source of revenue for the state;

2.                  Source of employment;

3.                  Encourages investments;

4.                  facilitates growth of capital markets by creating effective demand for securities;

5.                  encourages savings

6.                  encourages growth of risky enterprises;  i.e. aviation industry

CHALLENGES FACING THE INSURANCE INDUSTRY IN KENYA

1.                  Ignorance

2.                  Government or State Control;

3.                  Low levels of income;

4.                  HIV Aids

5.                  Fraud;

6.                   

Insurance Law-Lecture 4

10 July 2004

THE NATURE AND SCOPE OF INSURANCE CONTRACT

Jupiter General Insurance Co v Kassanda Cotton. Case shows that you can have an oral contract. But in practice today that is not possible. The contract must be embodied on a document, some note or memorandum. But the law does not require a written contract: the general principles of contract apply.

The contract of insurance must satisfy the basic requirement of a contract at common law. That is an offer by one party must be unequivocably accepted by the insurer  consideration must be furnished, the parties must have intended their dealings to give rise to a contract and the purpose of the agreement must have been legal.

A contract of insurance is generally not subject to any legal formalities. See the case of Jupiter General Insurance Co v Kassanda Cotton (1966) EA 252; Murfit v Royal Insurance Co (19.22) 38 TlR 334; Ackmanm v Policyh holders protection Bound (1992) 2 Lloyds Ref 221

However marine insurance contracts must be written. Section 22 (1) of the Marine Insurance Act provides that a contract of marine insurance is inadmissible in evidence unless it is embodied in a policy in accordance with the Act. Under section 23 the policy must certify:

1.         the name of the insured or the person who effects the policy on behalf of the insured

2.         subject matter of the insurance and the risk insured against, the voyage, period of time or both as covered by the policy, sum or sums insured

3.         particulars of the insurer

Under section 24 the policy must be signed by or on behalf of the insurer. Life, fire and other types of insurance are not subject to such statutory formalities. However, under the stamp duty act section  an insurer policy  must have a duty imprint on its face failing which it is inadmissible in evidence and the insurer is liable to a fine. In insurance contracts the offer is made by the proposer by completing and submitting the proposal form to the insurer. The proposal form is standard and its terms are not subject to bargain or negotiation. The proposer’s offer must be as complete as possible in materiality and must be communicated to the insurer. The proposer must have an insurable interest in the subject matter. The proposal form  is the document furnished by the insurer for completion by the proposer and varies in form and content  depending on the character of cover sought. It solicits specific information in relation :

1.         particulars of the proposer, that is name, postal address, occupation, residence, etc.

2.         the risk or risks to be insured. The proposer must specify the events to be covered as well as the duration of cover.

3.         circumstances affecting the risk. These are circumstances peculiar to the subject matter

4.         history of the subject matter, for example, whether risk has previously attached, previous insurance, refusal to insure if any, cancellation of insurance, etc. (these are material facts)

The contents of the proposal form enable the insurer make a fair decision on whether or not to take the risk and how much premium to charge. In addition, the proposer declares that the information provided is true and forms the basis of the contract between them. Re Yagar v Guardian Assurance Co (1912) 108 MT 38; Stir Fire and Burglary Insurance Co v Davidson (1902) 5 AS 38; Interfoto Picture Library Ltd v  Silhouette Visual Programmes Ltd (1989) QB 433; Rust v Abbey Life Assurance Co. (1979) 2 Lloyds Report 334.

Submission to the insurer of a completed proposal form  constitutes the formal offer by the proposer and if accepted a contractual relationship exists between them. Before cover is extended the insurer must ascertain whether the offer is worth during which time  the proposer may remain uninsured. In property insurance insurers grant a cover note in the meantime. This is a technical terms used to describe the temporal insurance cover extended to the proposer between presentation of the proposal form and its acceptance of rejection. It is argued that

1.         before insurance cover is extended care must be taken to assess and ascertain the risk being undertaken.

2.         the insurance industry is rigid and formal, hence the need for more time.

3.         as explained in the case of Julian Bright v HG Poland (1960) Lloyds Report 420 the typical motorist is impatient and requires immediate cover before the traditional steps are followed. The cover note needs not be a formal note; it suffices if the insurer intimates to the propose that cover has been extended from a particular date. See case of Murfit v Royal Insurance Company Ltd, it was held that a letter from the head office of the company indicating that cover had been extended in a particular situation constituted a cover note. The cover note operates as a contract between the proposer and the insurer on the terms and conditions  embodied therein or imputed from the type of the policy applied for. The insured is entitled to enforce the contract evidenced by a cover note should the risk attach. If the document is comprehensive the insured recovers on the basis on its terms and conditions, if not he recovers on the terms of the policy applied for. The cover note is ordinarily effective for 30 days. Under section 75 of the Stamp Duty Act a policy should be insured within 30 days of receipt of the proposal form. However in practice its duration varies. If the insurer declines to take the risk such refusal must be communicated to the proposer so as to bring to an end the effect of the cover note. Cartwright v MacCormack Trafalgar Insurance Co. (1963) 1 All ER. The court of appeal stated inter alia that an insurer must signify his rejection of the proposal form expressly in order to bring to an end of the binding nature of the cover note. The legal effect of the cover note lapses when the insurer issues the policy. The effect of the policy is backdated to the date of the cover note. Jadavyi v Shanji Panday v Oriental fire and General Insurance Co (1957) EA 21; General Re-Insurance Case (1982) QB 1022, Stockton v Mason (1978) 2 LR 43

Acceptance of proposal form

An insurer is not bound to accept any proposal form. He has the sole prerogative to accept or reject the offer. However, refusal must be communicated promptly. The insurer cannot while accepting the proposal form vary its terms without the concurrence of the proposer. An insurance may signify acceptance of the proposal form in various wasys:

1.         formal communication. See Canning v Hoare (1885) 14 TLR 526.

2.         issue of the policy. Generally issuance of the policy by an insurer is conclusive evidence of acceptance of the proposal form. The policy becomes effective from the date of issue notwithstanding any defects in the proposal form. See McElroy v London Assurance Corporation (1894) 24 Lloyd Report 287. where the proposer had not signed or authenticated the proposal form but the insurer issued a policy. A subsequent attempt by the insurer to cancel the policy on the ground of the defect in proposal form failed. It was held that the policy was binding as its issue was conclusive evidence that the insurer had accepted the proposal form. However, issue of the policy is not conclusive evidence if

1.         the insured does not treat it as such and continues negotiation

2.         where the policy departs from the terms and conditions of the proposal form by introducing new terms. Pear Life Assurance Co. v Johnson (1909) 2 KB 88

3.         by conduct. The fact that the insurer has not communicated with the proposer or has not issued a policy does not necessarily mean that cover has not been extended. The insurer’s conduct may be unequivocal that there is cover. Jupiter v General Insurance; Adie and Sons v Insurance Corporation Ltd (1898) 14 TKR 554; Re Yager Guardian

4.         acceptance of premium. Acceptance and retention of premium by the insurer gives rise to a presumption of an acceptance of a proposal form. However, such acceptance and retention does not impose a duty on the insurer to issue a policy. In McElroys Case, Lord Maclaven observed in page 291: “The company is not bound to deliver a policy without the payment of the premium. If they accept a premium before delivering a policy I should be disposed to hold that the acceptance of the premium and the delivery of the receipt therefore was sufficient to create the obligation to issue a policy unless circumstances can be shown to the contrary.”

Acceptance of the proposal form marks the end by the insurer of the proposer’s duty to disclose material facts. As a general rule  the insurer cannot avoid the contract on the ground of nondisclosure of facts discovered after acceptance of the proposal form. Whitewell v Auto Car Fire and Accident Insurance Co (1927) 27 Lloyds Ref 41); Re Economic  Fire Office (1896) 12 TLR 142; Harrington v Pearl Life Assurance Co (1913) 30 TLR 24.

Commencement of cover

Commencement of cover determines the time from which the insurer is obliged to pay the sum assured or indemnity should the risk attach. The date and time of commencement of cover is critical. As a general rule cover commences at the time and date specified by the cover note or policy. If silent on the time or in cases of ambiguA full day isCartwright v  Mac Cormack Traflage Insurance Co. Ltd.  An insurance company issued a cover note to a motorist stating that  “effective time and date of commencement  as 11.45 a.m.  on decdember 2 1959. The cover note stated “this cover is only valid for 15 days  from the commencent date of risk. Under no circumstances is the time and date of commencement of risk to be prior to the actual time   of issue of this cover note. In any event the duration of this cover note  shall bnot be more than 15 days from the date of commencement kof the insurance stated herein”. The motorist was involved in an accident at 5.45 p.m. on December 17 1959. Question was whether the insurer was liable to indeminify the insured. Was the company liable, that is the question? The question  will depend on thewhen cover commenced. ity cover commences at the beginning of the enext full day.

Catwright V.

After reviewing a number of authorities Harman L.J. observed (p1415) “ these cases seem to me to show that generally speaking when a day is mentioned from which the time is to start running, fractions of a day ought to be disregarded and time should run from midnight and therefore the 15 days is to be calculated from midnight on the commencement day”;  

The court of Appeal was of the view that the dispute was on a question of construction of the policy and on its true construction the insured was covered when risk attached.  Refer to Hayman V. Dowins [1942] A.C. 356 AND Stewart V. Chapman 1951] 2. All E.R. 613

Hercules Ins. Co. V.l Trivedi and Co. Ltd. [1962] EA 348, Cornfoot V Royal Exchange Ass. Corporation [1904] 1 K.B. 40

TERMINATION OF INSURANCE CONTRACTS:

How may an insurance contract be terminated.

(a)                                        Lapse of time;  Indemnity Contract especially in property contract and marine insurance contracts;

(b)                                       Operation of Law – circumstances render it impossible for sustenance of the policy i.e. liquidation or winding up of the insurance company or transfer of subject matter  refer to Kinyanjui V South India Insurance Co. [1968] WA 160;

(c)                                        Mutual consent (Agreement at the instigation of either party)  consent or intimation to terminate must be in writing.  In life insurance under S. 89 it is possible to instigate termination of the contract.  The caveat is that if the insurance is terminated before 3 years lapse there is nothing payable but after 3 years there is a surrender value payable of three quarters of the premium.

(d)                                       Indemnity or payment of the sum assured terminates the contract of insurance.  If the subject matter is destroyed, it terminates the insurance or when the endowment policy matures we terminate the policy.

(e)                                        Breach of conditions or warranties i.e. non-disclosure of material facts or misrepresentation of material facts refer to Jubilee Insurance Co. V John Sematengo [1965]  the Plaintiff Insurance company filed a suit against the Defendant for a declaration that the company was entitled to avoid a motor insurance policy on the ground that it had been obtained by non-disclosure of material facts and misrepresentation of facts.  The insured had inter alia failed to disclose the facts that the subject matter of insurance had been involved in an accident a day before it was insured and that it had a major mechanical defect.  It was held that the insurance company was entitled to avoid the contract.  Sir Udo Udoma said “the Plaintiff company is entitled to the declaration sought because it has satisfactorily discharged the onus which is upon it of establishing by a preponderance of evidence that the insurance policy and the certificate were obtained by the Defendant by the non-disclosure of a material fact or by a representation of facts which was false in some particular”.   The other case is The Motor Union Insurance Co. V AK Ddamba [1963] EA 271.  Peters V. General Accident and Life Assurance Co. [1937] 4 All E.R.  this case illustrates termination by operation of law -

CONSTRUCTION OF THE INSURANCE POLICY (INTERPRETATION OF THE INSURANCE POLICY

Construction of an insurance policy is basically construction of a contract

Courts of law are often called upon to construe insurance policies.  Such construction may be necessary to ascertain and give effect to the intentions of the parties as well as enhance uniformity in the legal effect of terms and clauses used in insurance policies by insurers.

Application of the Doctrine of Precedent:  (Stare Decisis)

As a general rule where courts have already construed or decided the meaning of words and phrases used in a policy of insurance, the doctrine of precedent applies in subsequent similar cases and a similar construction is given.  In the words of Park B. in Glenn V Lewis [1853] 8 Exch. 607   “If a construction has already been put on a phrase or clause in a contract of insurance the same should be given in subsequent similar cases”.  However in the words of Lord Atkin L.J.  in Re Calf and Son Insurance Office [1920] 2 K.B. 366 “On a question of construction I protest against one case being treated as an authority in another unless the language and the circumstances are substantially identical.   That question was also addressed in the following cases

Lowden V. British Merchants Ins. Co. [1961] 1 Lloyds Rep 155

Lawrence V. Accidental Ins Co. [1881] 7 QBD 216

Dino Services V. Prudential Ass Co. Ltd [1989]1 All E.R. 422

1.         Intention of the Parties:

It is a fundamental rule of construction that the intention of the parties prevail.  Such intention is discernible from the policy itself and the documents incorporated therewith if any.  Courts are discouraged from speculation but reference to surrounding circumstances may be made for example a previous construction of similar terms or phrases.

2.         The wholistic Rule

a policy of insurance must be interpreted in its entirety.  In the words of Lord Atkin L.J. In Hamlyn V. Crown Accidental Ins Co. [1893] 1 Q.B. 750  “You must look at the document as a whole.”  All words and phrases must be interpreted and none ought to be rendered meaningless without good cause.  Generally the policy should be interpreted to give all clauses a positive meaning so as to give effect to the intentions of the parties.

3.         Literal Rule

Words and phrases should be given their ordinary or natural meaning and sentences their ordinary grammatical meaning.  Application of this rule is justified on the premise that insurance practices and usages evolved in the course of ordinary commercial transactions.  In the words of Devlin J.  in Leo Rapp Ltd V. Mclure [1955] Lloyds Rep 292  he stated “ when the court is construing words in an insurance policy, it must give them their ordinary natural meaning.”  In the case of Thompson V. Equity Fire Insurance Co. Ltd [1910] A.C. 592 

However, technical meanings must not resulted to unless necessary to amplify the ordinary meaning of the words.  Nevertheless technical words and phrases must be given their technical meaning.  Technical legal terms must accorded their strict technical meaning.   The case of London & Lacanshire Fire Insurance Co. V. Bolands [1924] A.C. 836

4.         Ejusdem Generis Rule

This rule is used to interpret things of the same kind genres or species.  If the policy is inexhaustive words and phrases must be interpreted within the same class genres or species.  The unidentified or instances must be interpreted ejusdem generis the words before them.  Refer to King V. Travellers Ins. Co. [1931] 48 L.T.L 53  The Plaintiff took out an insurance policy covering jewellery, cameras, field glasses, watches and other fragile or specially valuable articles.  The Plaintiff’s fur coat was stolen.  On a claim of indemnity under the policy, the insurer averred that the court was not within the same genus though it was a household item.  It was held that the fur coat did not fall within the same class as the items enumerated by the policy and the insurer escaped liability. 

This rule is only applicable where specifications of particular things belonging to the same genus precede a word of general signification.  Refer to the case of Mair V. Railway Passengers Ass Co. [1877] 37 LT 356

6.         The Expressio Unius est exclusion Ulterius  (Expression Rule)

This rule is to the effect that where a word of general signification is followed by words of limitation or definition, the first word is construed as limited and applying only to the particulars specified.

Where a policy contains conflicting words, phrases or sentences, the court must construe the same so as to give the policy (through reconciliation) a positive legal meaning.  Where the conflicts are irreconcilable courts have evolved several rules of construction.  However if the intentions of the parties can be ascertained, any repugnancy in the contract may be disregarded.

Minor Rules

(a)         Written words prevail over printed terms though both are manifested or expressed, greater consideration ought to be given to written words or clauses.  Refer to the case of Yorkshire Ins Co V Campbell [1917] A.C. 218

(b)        Express terms override implied terms.  Where all terms are printed latter terms are given more effect in the case of a conflict on the premise that they are intended to qualify the former.

(c)         Parole Evidence Rule:  where contractual terms are written as a general rule parole evidence is inadmissible to vary or change the written terms.  However, such evidence may be admissible to demonstrate the circumstances in which the contract was entered into.  In an insurance contract such evidence may be admitted to establish a trade usage or custom in insurance.

(d)        Contra Proferenterm Rule:    in the words of Roche J. Simmonds V. Cockell [1920] 1 K.B. 843 845 the judge stated “it is a well known principle of insurance law that if the language of a warranty  in a policy is ambiguous, it must be construed against the underwriter who has drawn the policy and inserted the warranty for his own protection.”  This rule of construction is applicable if the policy contains vague or ambiguous words or sentences.  They must be construed contra proferentes (restrictively against the party relying on them) See Houghton V. Trafalgar Ins Co [1954] K.B. 247  [1953] 2 L.R. 503.  A motor insurance cover excluded “loss, damage and/or liability caused or arising while the car is conveying any load in excess of that for which it was constructed”.  At the material time the vehicle had a driver and 5 passengers.  It was involved in an accident.  The insurer disclaimed liability citing the above clause.  The court relied on the contra proferenterm rule and found the insurer liable.  In the words of Sommervel L.J. “If there is any ambiguity it is the company’s clause and the ambiguity will be resolved in favour of the assured.   English V. Western [1940] 2 K.B. 156.

PRINCIPLES OF INSURANCE:

Insurable Interests:

Insurable interest is the very basic principle of insurance.  The phrase insurable interest is that which we are likely to lose if loss occurs.  It is the one that propels us to take out insurance.

This is one of the basic requirements of a contract of insurance.  The insured must exhibit an insurable interest in the subject matter at one time or another failing which the contract is invalid.  In Anctil V. Manufacturers Life Ins Co. [1899] A.C. 604 Insurable interest is the pecuniary or proprietary interest which is at stake or in danger if the subject matter is uninsured.  The classical definition of insurable interest was given by Lawrence J. in  Lucena V. Craufurd [1806] 2 Bos & PNR 296  “A man is interested in a thing to whom advantage may arise or prejudice happen from the circumstances which may attend it…  and whom it importeth that its condition as to safety or other quality should continue, interest does not necessarily imply a right to the whole or a part of a thing, nor necessarily and exclusively that which may be the subject of privation, but the having of some relation to, or concern in the subject of the insurance which relation or concern by the happening of the perils insured against may be so affected so as to produce a damage detriment or prejudice to the person insuring, and where a man is so circumstanced with respect to matters exposed to certain risks or damages or to have a moral certainty of advantage or benefit, but for those risks or dangers, he may be said to be interested in the safety of the thing.  To be interested in the preservation of a thing is to be so circumstanced with respect to it as to benefit from its existence, prejudice from its destruction.  The property of a thing and the interest devisable from it may be very different, of the first, price is generally the measure, but by interest in a thing every benefit or advantage arising out of or depending on such thing may be considered as being comprehended.”

After reviewing a number of authorities Harman LJ observed: These cases seem to me to show that generally speaking when a day is mention from which the time is to start running fractions of a day ought to be disregarded and time should run from midnight and therefore the 15 days is to be calculated  from night on the commencement day.”

The Court of Appeal was of the view that the dispute was on a question of construction of the policy and on its construction the ensured was covered when risk attached. See the following cases:

Hayman v Dowins (1942) AC 356

Steward v Chapman (1951) 2 All ER 613

Hercules Insurance Company v Trivedi and Co. Ltd (1962) EA 348

Cornfoot v Royal Exchange Assurance Corporation (1904) 1 KB 40

Termination of insurance policies

How can an insurance policy be terminated?

1. Lapse of time

2. Operation of law—Liquidation of insurance company—transfer of subject matter. See the case of Kinyanjui v South India Insurance Co. (1968) EA 160.

3. Mutual consent-agreement-must be written. It is easier to surrender an indemnity insurance. In life policy you get nothing if the insurance premium have not be paid.

4. Indemnity or  payment of sum assured. If there is partial loss the contract remains.

5. Breach of conditions or warranties, such as non disclosure and misrepresentation(See Jubilee Insurance Co. v John Sematengo (1965).. the plaintiff insurance company filed a suit against the defendant for a declaration that the company was entitled to avoid a motor insurance policy on the ground that it had been obtained by non disclosure of material facts and misrepresentation of facts. The insured had inter alia failed to disclose the fact that the subject matter had been involved in an accident a day before it was insured and that it had a major mechanical defect. It was held that the insurance company was entitled to avoid the contract. Sir Udo Udoma: ” the plaintiff is entitled to the declaration sought because it has satisfactorily discharged the onus which is upon it of establishing by a preponderance of evidence that the insurance policy and the certificate were obtained  by the defendant by the non disclosure of material facts or by a misrepresentation of facts which was false in some material particular.”

See The Motor Union Ins. Co Ltd v  A K Ddamba (1963)

Peters v General Accident and Life Assurance Co

Construction of the Insurance policy

Courts of law are often called upon to construe insurance policies. Such construction may be necessary  to ascertain and give effect to the intentions of the parties as well enhance uniformity in the legal effect of terms and clauses used in insurance policies by insurers.

Application of the principle of precedent

As a general rule where courts have already construed the meaning of words or phrases used in a policy of insurance the doctrine of precedent applies in subsequent similar cases and a similar construction is given. In the words of Park B in Glen v Lewis (1853) 8 Exch. 607: “If a construction has  already been put on a phrase or clause in a contract of insurance the same should be given in subsequent similar cases.”

However, in the words of Alkin LJ in the case Re Calf and Sun Ins. Office (1920): “On a question of construction I protest against one case being treaty as an authority in another unless the language and the circumstances are substantially identical. Also see the case of Louden v British Merchants Ins. Co. (1961) 14 Lloyds Rep. 155; and

Lawrence V Accidental Ins. Co (1881) 7 QBD 216

Dino Services v Prudential Ass Co. Ltd (1989) 1 All Er 422

Intention of the parties

It is a fundamental rule of construction that intention of the parties prevail. Such intention is discernible from the policy itself and the documents incorporated therewith if any. Courts are discouraged from speculation but reference to surrounding circumstances may be made. For example a previous construction of similar term or phrases.

The holistic rule

A  policy of insurance must be interpreted in its entirety. In the words of Alkin  LJ in Hamlyn v Crown Accidental Ins. Co (1893) IQ 750: “You must look at the document as a whole”.

All words and phrases must be interpreted and non ought to rendered meaningless without good cause. Generally the policy should be interpreted  to give all clauses a positive meaning so as to give effect to the intentions of the parties.

The literal rule

Words and phrases should be given  their ordinary or natural meaning and sentences their ordinary grammatical meaning. Application of this rule is justified on the premise that insurance practices and usages evolved in the cause of c=ordinary commercial transactions. In the words of Devlin J in Leon  Rapp  Mclure (1955) Llyods r 292 “ When the court is construing words in an insurance policy it must give them their ordinary natural meaning.”

See case of Thompson v Equity  Fire Ins Co (1910).

However technical meanings must not be resorted to unless necessary to amplify the ordinary meaning of the words

Nevertheless technical words and phrases must be given their technical meaning. Technical legal terms must accorded their strict technical meaning. See case of London and Lacanshire Fire Ins Co v Bolands (1924) AC 836

Ejusdem generis

This rule is used to interpret things of the same kind, genus or species . If the policy is inexhaustive words and phrases must be interpreted  within the same class genus or species. The undentified facts or instances must be interpreted ejusdem generis the words before them. See King v Traveller Ins. Co. (19310N 48  ltl.. THE plaintiff took out an insurance policy covering jewellery, cameras, field glasses, watches and other fragile or specially valuable article. The plaintiff’s fur coat was stolen. On a claim of indemnity under the policy  the insurer averred that the coat was not within the same genus though it was a household item. It was held that the fur coat did not fall within the same class as the items enumerated by the policy and the insurer escaped liability. This rule is only applicable  where specifications of particular things belonging to the same genus precede a word of general signification. See  Mair v Railway Passengers Ass Co (1877) 37 LT 356.

Expressio unius est exclusio ulterius.

This rule is to the effect that where a word of general signification is followed  by words of limitation or definition the first word is construed as limited and applying only to the particulars specified. Where a policy contains conflicting words phrase or sentences the court must construe the same so as to give the policy a positive legal meaning. Where the conflicts are irreconciliable courts have evolved several rules of construction. However if the intention of the parties can be ascertained any repugnancy in the contract may be disregarded.

First, written words prevail over printed terms though both are expressed greater consideration ought to be given to written words or clauses. See Yorkshire Ins. Co v. Campbell (1917) AC 218.

Express terms override implied terms. Where all terms are printed latter terms are given more effect in the case of a conflict on the premises that they are intended to qualify the former.

Parole evidence rule

Where contractual terms are written as a general rule parole evidence is inadmissible to vary or change the written terms. However, such evidence may be admissible to demonstrate the circumstances in which the contract was entered into. In an insurance contract such evidence may be admitted to establish a trade usage or custom in insurance.

Contra proferentem rule

In the words of Roche J in Simmonds v Cockell (1960)  IKB 843 at 845: “It is a well known principle of insurance law  that if the language of a warranty in a policy is ambiguous it must be construed against the underwriter who has drawn the policy and inserted the warranty for his own protection.”

This rule of construction of contraction the policy contains big or ambiguous words or sentences. They must be construed contra proferentes against the party relying on them. See Houghton v Trafalgar Ins Co (1954) JB 247)..a motor insurance cover note exclude “loss, damage and or liability caused or arising while the car is conveyed any load in excess of that for which it was constructed at the material time the vehicle had a driver and five passengers. It was involved in an accident. The insurer disclaimed liability citing the above clause. The court relied on the contra profrentem rule and found the insurer liable. In the words of Somervel LJ: “If there is any ambiguity it is the company’s clause and the ambiguity will be resolved in favour of the assured.” See case of English v Nelson (1940) 2 KB 156

Principles of Insurance

Insurable interest

This is one of the basic requirements of a contract of insurance. The insured must exhibit an insurable interest in the subject matter at one time or another, failing which the contract is invalid. See case of Anctil v Manufacturers Life Insurance Co. (1899) Insurable interest is the proprietary interest which is tat stake or in danger if the subject matter is uninsured. The classical definition of insurable interest was given by Lawrence J in Lucena v Crauford (1806) 2 Bos & PNR: “A man is interested in a thing to whom advantage may arise or prejudice happen from the circumstance that may attend it… and whom it is importeth that it condition as to safety or other quality should continue, interest does not necessarily imply  a right to the whole or a part of a thing, nor necessarily and exclusively that which may be the subject of privation but the having of some relation to, or concern in the subject of the insurance, which relation or concern by the happening of the perils insured against may be so affected so as to produce a damage, detriment or prejudice to the person insuring, and where a man  is so circumstanced with respect to matters exposed to certain risks or damages or to have a moral certainty of advantage or benefit, but for those risks or dangers he may be said to be interested in the safety of the thing. To be interested in the preservation of a thing is to be so circumstanced with respect to it as to benefit from its existence, prejudice from its destruction. The property of a thing and the interest devisable from it may be very different, of the first, price is generally the measure, but by interest in a thing every benefit or advantage arising out of or depending on such thing may be considered as being comprehended.”

Medieval –wager insurance possible.

This definition of partially adopted by the Marine Insurance Act 1906. A person is deemed to have an insurable interest if in the subject matter if he is likely to suffer prejudice in the events of its loss, damage or destruction.

Insurable interest is essentially the pecuniary or financial interest in danger. To ascertain whether a person has an insurable interest courts have abstracted the following rules”

1.         there must be a direct relationship between the insured and the subject matter.

2.         the relationship must have arisen out of a legal or equitable right or interest in the subject matter.

3.         the insured’s right of interest must be capable of financial or pecuniary estimation

4.         the insured bears any loss or liability arising in the event of attachment of the risk

As a general rule insurable interest ought to have a pecuniary value. See Hafford v Kymer (1830) 10 B and C 742 However it need not be permanent of continuing. A right to a future interest or possession is insurable. However a mere expectation of acquiring an interest is not insurable. See Stockdale and Co v. Dunlop (1840)  6 M and W 224.

Medieval common law did not insist on the presence of insurable interest on the part of the insured. Its requirement is for the most part statutory. For example under section 41 of Marine Insurance Act 1746 insurable interest was made a prerequisite of marine insurance by the provision to the effect that every contract of marine insurance by way of gaming or wagering is void. This requirement was extended to life insurance by the Life Assurance Act 1774 which provided inter alia no insurance shall be made by any person or persons on the life or lives of any person or persons or any other event or events whatsoever wherein the person or persons for whose use, benefit or on whose account such policy or policies shall be made shall have no insurable interest.

The requirements of insurable interest was extend to all categories of Insurance by the Gaming Act 1845. Under section 5 (1) of the Marin Insurance Act and section 94(1) of the Insurance Act the insured must have an insurable interest in the subject matter.

Who has an insurable interest?

Insurance Co Ltd v Stimson (1888) 103 US 25 471, where a contractor insured a hotel after its completion but before handing it over to the owner and the building was subsequently destroyed by fire before the policy lapsed. It was held that the contractor had an insurable interest by virtue of the mechanic’s lien.  However in Stockdale v Dunlop where the plaintiff had insured the value and profit of palm oil he had verbally agreed to buy from a company while the ships were on the high seas but one went missing. A claim for indemnity failed as the insured had no insurable interest in the oil. A similar holding was made in Macaura v Northern Assurance Co. Ltd (1925) AC 69 where the insured had taken out a policy over the company’s timber.

In Thomas v Continental Creditors Ltd (1976) AC 346 it was held inter alia that a creditor had an insurable interest in the life of a debtor to the extent of the debt. In Hebdon v West (1863) 3 B and C 579 it was held that an employer has an insurable interest in the life of an employee to the extent of the services rendered. In addition, an employee has an insurance interesting the life of the employer to the extent of their relationship.

In Griffith v Flemming (1909) 1 KB 805 it was held that a husband has an insurable interest in the life of his wife and vice versa.

In Sat Dev Sharma v The Home Insurance Co of New York (1966) EA 8 it was wrongly held that the proprietor of a driving school had no insurable interest in the life of his instructors. In Harse v Pearl Life Insurance Co (1904) 1 KB 558 where an agent in honest belief that the insured had an insurable interest in the mother’s life persuaded him to take out a policy on funeral expenses but subsequently sought to recover the premiums on the ground that the contract was void, it was held that there were irrecoverable as he had no insurable interest in the life insure (because both parties were in pari delicto). However in cases of active fraud by an insurance agent premiums paid are recoverable. As happened in the case of Hughes v Liverpool Insurance Law-Lecture 24 July

Victoria Legal Friendly Society (1916) 2 KB 482 where the defendant’s agents fraudulently induced the plaintiff to take out an insurance policy wherein he had no insurable interest. The court of appeal held that he was entitled to the premiums paid as the parties were not in pari delicto. In the words of Bankes LJ p-496: ”The authorities seem to me to be all one way, namely that an innocent plaintiff is entitled to say that he is not in pari delicto with the defendant whose agent by false and fraudulent misrepresentation induced him to believe that the transaction was an innocent one.”

Sections 7 to 15 of the Marine Insurance Act , cp 390 and section 94 (2) of the Insurance Act set out circumstances in which persons have insurance interest in the subject matter. See Newbury International Ltd v Reliance National (UK) (1994) 1 Lloyds Rep 83; Fuji Finance Inc v Aetna Life Insurance (1997) Ch 173; Glengate v Norwich Union Ins. Society (1996) 1 Lloyds 278; Colonial Mutual General Ins v ANZ (1995) 1 WLR 1140.

Nature of insurable interest

As a general rule the insured is not obliged to declare the nature or extent of  the insurable interest in the subject matter. Section 26 (2)OF THE marine Insurance Act provides that the nature and extent of the interest of the assured in the subject matter insured need not be specified in the policy. This is because insurers are generally more concerned with the sums payable or indemnity under the policy. However  a description of the nature and extent of insurable interest is necessary:

1.         where the proposal form contain a stipulation  to that effect

2.         where the subject matter of the insurance includes prospective profits or consequential loss

3.         where the subject matter involves precarious loss.\

The insured must have an insurable interest in the subject matter at one point or another:

1.         In indemnity contract, e.g. marine, burglary, etc insurance interest must exist when risks attaches. Section 61 of the Marine Insurance Act embody this rule. See Stockdale v Dunlop.

2.         In life insurance the insured must furnish insurable interest when the contract is entered into. It was so held in Dalby v India and London Life Assurance Co. (1854) 15  CB  365

3.         In statutory policies the insured must furnished insurable interest at the time stipulated by the statute. For example, in third party motor insurance the insured must have an insurable interest when loss occurs.

Role of insurable interest

1.         It establishes a nexus between the insured and the subject matter in that the insured starts to suffer prejudice in the event loss or destruction of the subject matter

2.         It confers upon the insured the requisite locus standi to sue on the policy. Cosford Union and Others v Poor Law and Local Government Officers Mutual Guarantee Asso. Ltd (1910) 103 LR 463.

3.         It is argued that insurance interest has been used by insurers as a profit maximization devise.

The doctrine of non-disclosure

The insured duty in insurance not to misrepresent any facts extents to a duty to disclose material facts. An insurance contract if vitiated by misrepresentation is voidable at the option of the innocent party and a claim in damages is sustainable if the misrepresentation was fraudulent. Additionally the insurer is entitled to retain any premium paid. The insurance contract is the best illustration of the contract uberrima fides. It is an exception to common law principle of caveat emptor. Both parties are bound to disclose material facts. It has been observed that “good faith forbids either party by concealing what he privately knows to draw the other into a bargain from his ignorance of that fact and his believing the contrary.”

The duty of disclosure in insurance is voluntary. It was first explained by Lord Mansfield in Carter v Boehm (1766)3 Bun 1905. He said: “Insurance is a contract upon speculation. The special facts upon which the contingent chance it to be computed lie more commonly in the knowledge of the insured only. The underwriter stiwrre to his and proceeds upon confidence that he does not keep back any circumstance in his knowledge to mislead the writer into a belief that the circumstance does not exist and to induce him to estimate the risk as it  did not exist. The keeping back such a circumstance is fraud and therefore the policy is void.”

Words to the same effect were expressed by Lesselm MR in London Assurance Co Ltd v Mansel  (1879) 11 Ch D 363. In Joel v Law Union and Crown Ins. Co (1907) 2 KB 863, Flecher Moutton observed ”In policies of insurance whether marine or life there is an undertaking that the contract is uberrima fides, that is if you know any circumstance at all that may influence the underwriter’s opinion as to the risk he is undertaking and consequently as to whether he will it or at what premium… you will state what you know. There is an obligation to disclose what you know and the concealment of a circumstance known to you whether you thought it material or not avoid the policy.”

Cases decided after  Carter v Boehm appeared to place a heavier duty of disclosure on the insured. In the words of Cockburn CJ in Bates v Hewett (1867)LR 2QB 595: “No proposition of insurance law  can be better established than this that the party proposing the insurance is abound to communicate to the insurer all matters which will enable him to  determine the extent of the against which he undertakes to guarantee the insured. Words to this effect were expressed by Kennedy LJ in London General Omnibus v Holloway (1912) 2KB 72.

Banque Keyser Ullman SA v Skandia (UK) Ins Co and Others (1987) 2 All Er 923, it was held that the duty of utmost good faith existing between an insurer and an insured in relation to contract of insurance was reciprocal and required the disclosure of all the material circumstances particularly those peculiarly within the knowledge of one part. Steyn J: ”Indeed it is difficult to imagine to imagine a more retrograde step, subversive of the standing of our law and our insurance markets than a ruling today that the great judge in Carter and Boehm erred in stating that the principle of good faith  rests on both parties>”

Home v Poland

Prudent insurer

Disclosure

Banque Financiere de la cite SA v Westgate (1991)

The duty to disclose depends on the knowledge of the parties but both are obliged to disclose material facts within their actual and presumed knowledge. Economides v Communal Union Ass Plc (1997) All ER

The parties must disclose material facts within their actual knowledge at the time and those which they ought in the course of business to have known. A party cannot escape liability for non-disclosing a fact which he ought to have known at the time of the contract. Only material facts ought to be disclosed. These are facts relevant to the risk in question

Courts have devised two tests of determining whether a fact is material or not:

1.         reasonable insured test. In Horne v Poland (1922) 2 KB 364 Lush J observed:

” A fact is material if a reasonable person would known that underwriters would naturally be influence in deciding whether to accept the risk and what premium to charge by those circumstances. The fact that they were kept in ignorance of them and indeed were misled is fatal to the plaintiff’s claim. The plaintiff was making a contract of insurance and if he failed to disclose what a reasonable man would disclose he must suffer the same consequences as any other person who makes a similar contract.

2.         prudent insurer test. Section 18 (2) of the Marine Insurance Act provides a circumstance is material if it would influence the judgment of a prudent insurer in fixing the premium or determining whether he will take the risk. In Associated Oil Carriers Ltd v Union Insurance Society of Cantion Ltd, Lord Atkin said:

“The insured should disclose facts which should influence the judgment of a prudent insurer in fixing the premium or determining whether he would take the risk”

These facts which an ordinary experience and reasonable insurer would consider material. This test was adopted in  Lamberd v Cooperative Insurance Society (1975) 2 Lloyds Rep 485.

CTI v Oceans Mutual Underwriting Ass (Bermuda) Ltd (1984) 1 Lloyds .  In that case the court of appeal held that a fact is material if an insurer would have want to know of its existence when make the insurance. This test appears to place a heavier burden on the insured.

So in Pan Atlantic CV Ltd v Pinetop (1993) ILR 443. The court of appeal held that a fact is material if a prudent insurer would have treated it as increasing the risk even though he might have reject the risk or charged a higher premium

Time of disclosure: the duty to disclose exists throughout the negotiation period. Material facts coming to the knowledge of the parties thereafter need not be disclosed., Lord Blamuel in Lishman v Northern marine Ins. Co (1875) LR 179. The time up to which it must be disclosed is the time when the contract is concluded. Any material facts that come to his knowledge or ought to have come to his knowledge before the contract is finally sealed must be disclosed to the insurer if the contract must still go on”.

The Dova (1989) 1 Lloyds REP 69

Whitewell v Auto Car Fire and Accident Ins. Co (1927) Lloyds Rep 41.

In rare circumstances the insurer may extend the duty of disclosure by subjecting it to payment of premium. Looker and Another v Law Union and Rock Ins Co (1928) 1 KB 354.  the insurer may also insist that the duty to disclose will subsist up to the date of issue of the policy. Case of  Allis Chalmers Co v fidelity and Deposit Co of Maryland (1916) 114 LT 433

Effect of non-disclosure

The non-disclosure of a material fact by either parties renders the contract voidable at the option of the innocent party. London Assurance Co Ltd v Mansel, and Horne v Poland.

As enunciated in Carter v Boehn the doctrine of disclosure appeared fair to both parties in that certain facts may be peculiarly be in the knowledge of one party. However subsequent developments placed a heavier burden on the insured on the assumption that he has a monopoly of knowledge in relation to the subject matter. During the mercantile era the doctrine was justified in that the proposer knew everything about the subject matter while the insurer knew nothing. This is no longer the case as the insurer has the means and capacity of ascertaining the factual situation of the subject matter.

The doctrine has been used by insurers to escape liability exploiting the information gap between what is disclosed and what ought to have been disclosed.

Although the contract of insurance is one of the utmost good faith certain matters need not be disclosed. For example

1. in contracts of marine insurance the matters specified in section 18 (3) of the Marine Insurance Act

3.         unknown facts as was the case of Joel v Law union and Crown Ins co.

4.         matters of public notroeity as in Bales v Hewett(1867)

Principles of law

3. Indemnity

This is as common law principle by which the insured is not permitted to profit by his misfortune. It means the function of property insurance is to place the insured within the limits of the policy and its conditions as far as possible in the same position as he would have occupied had the event insured against not occurred. It has been observed that a policy of insurance is a contract of indemnity against loss and to produce gain. The law does not sanction any insurance which would directly and immediately make the insured party a gainer by the destruction of the thing destroyed because it otherwise there would be a temptation to destroy the thing insured and thereby get the money.

Indemnity means that when risk attaches the insurance company is an obligation to put the insured to the position he was before the loss. It means that there should be no more  and no less than  the restitutio in integrum.

In the words of Brett LJ in Castellain v Preston (1883): “The foundation in my opinion of every rule which has been applied to insurance law is this: that the contract of insurance contained in a marine or fire policy is a contract of indemnity and of indemnity only and that this contract means that the assured in case of a loss against which the policy has been made shall be fully indemnified but shall never be more than fully indemnified”

This principle ensures that the insured is only restored to the position he was and does not benefit from the contract. To give effect to indemnity means that when loss occurs or attaches it is duty of the insurer to ascertain whether there was circumstances which reduce, diminish or extinguish the  insured’s loss as they have a similar effect on the amount payable by the insurer.

In the words of Blackburn LJ in Arthur Charles Burnard v  Rodocanachi and Sons Ltd (1882) 7 AC 333: ”The general rule of law is that when there is a contract of indemnity and loss happens anything which reduces, diminishes or even extinguishes the amount which the indemnified is bound to pay and if the indemnifier has already paid it than if anything which diminishes the loss comes into the hands of the person to who he has paid it becomes an equity that the person who has already the full indemnity is entitled to be recouped by having the amount back.”

There are circumstances in which the insured is abound to account for anything over and above the indemnity. For example, where he receives a gift payment or a payment arising from tortuous liability.

Gift payments

If a third party makes a voluntary payment to the insured the insurer is not precluded from claiming the benefit of such payment if its effect is to diminish or extinguished the insured’s loss. However, the purpose of the gift is critical in determining whether the insurer can take advantage of it. In Castellain v Preston (1881-5) the defendant who owned a house in the city of Liverpool took out a fire policy on it for 3,100 pounds. Thereafter he entered into a contract to sell the house. However, before the sale was concluded the house was partially destroyed by fire and the insurer in ignorance of the fact that there was a contract of sale paid 330 pounds for the loss. The sale was subsequently completely and Preston received the entire purchase price. The insurer claimed the 330 pounds on the premise that the contract was one of indemnity and the insured had suffered no loss. It was held that the insured was bound to account for the sum as he suffered no loss. In the words of Brett LJ “That is a fundamental principle of insurance and if ever a preposition is brought forward which is at variance with it, that is to say which either will prevent the assured from obtaining a full indemnity or which will give the assured more than a full indemnity that proposition must certainly be wrong. Case of Stearns v Village Main Reef Gold Mining Co Ltd (1905). For the insurer to claim a reimbursement of an account it must be evident that:

1.         he has indemnified the insured in full

2.         the gift was paid by the third party for the benefit of all parties

3.         the gift had the effect of diminishing or extinguishing the insured’s loss. Pandall v Lithgow (1884)

Payment out of tortuous liability

Yorkshire Insurance Co. Ltd v Nisbett Shipping Co Ltd (1962) 2 QB 330. the insured owned a vessel “Blasirenevis” which he issued against loss or damaged by marine risks under a valued policy for 72,000 pounds. On /February 13 1945 the ship was damaged in a collision with a Canadian submarine and became a total loss  no salvage value on 20 April 1945 the insurer paid the insurer 72,000 pounds for the loss,. In September 1946 the insured with the insurer’s approval commenced proceedings against the Canadian government for loss of the ship and the Canadian government paid 336,039.53 Canadian dollars. Since the Canadian dollar had been devalued when converted to pounds the insured realized 55,000 pounds more than the amount paid by way of indemnity. The insured refunded the insurer 72,000 pounds. The insurer sued the insured under section 79(1) of the Marine Insurance Act claiming that it was entitled to the 55,000 pounds under subrogative rights. The court held that the insurer was not entitled to the sum as an insurer cannot recover from the insurer an amount higher than the amount payable by way of indemnity.

In Darrell v Tibbitts (18879-80) 5 QBD 560, the insured took out a fire policy on his house. Thereafter the house was destroyed by fire on account of a third party’s negligence. The insurer indemnified the insured for the loss. It was held that the insurer was entitled to recover the amount paid to the insured as indemnity.

The effect of an indemnity is that the insured must not gain or lose by the attachment of gift. The principle of indemnity has its justifications in equity. It is argued that in its absence, the insured would be unjustly enriched. This principle is given effect buy other subordinate principles, for example, subrogation, salvage, reinstatement, contribution and apportionment, etc. this principle ensures that the insurer benefits from the contract of insurance. Section 67 (1) of the Marine Insurance Act embodies this principle

Scottish Union and National Insurance Co. v Davis (1970)

The Italian Express (No 2) (1992) Llyods Rep 281

Subrogation

In the words of Cairns CJ in Simpson v Thompson (1877): “Where one person has agreed to indemnify another he will on making on good the indemnity be entitled to succeed to all the ways and means by which the person indemnified might have protected himself against or reimburse himself for the loss”.

In contracts of indemnity, by virtue of payment, the insurer becomes entitled to be placed in the position of the insured and succeeds to all legal and equitable rights in respect of the subject matter of insurance.

Subrogation literally means putting the insurer into the shoes of the insured after indemnity.

Origins of subrogation

Judicial authority has it  that subrogation has its origins and rationalizations at common law and equity. In Yorkshire Ins. Co v Nisbette Shipping, Lord Diplock referred to referred to subrogation as a common law principle arising out of a term implied in every contract of indemnity insurance.

In Napier v Hunter (1993) Lord Templeman observed: “The principal which dictated the decisions of our ancestors and inspired their references to the equitable obligations of an insured person towards an insurer entitled to subrogation are discernible and immutable. They establish that such an insurer has an enforceable equitable interest in the damages payable by the wrongdoer.”

However, the application of the principle of subrogation may be modified, extended or excluded by contract. The extension of subrogative rights by express terms in insurance policy is common.

The principle of subrogation is a latent and inherent characteristic of the contract of indemnity but does not become operative or enforceable until actual payment is made by the insurer. It derives its life from the original contract but gains its operative force from payment at the contract. In the words of  Blackburn LJ Burnand v Rodocachi : “If the idemnifier has already paid the insured then  anything which diminishes the loss comes into the hands of the person to whom the idemnifier has paid it. It becomes an equity that the person who has already paid full indemnity is entitled

Morris v Ford Motor Co. (1973) 1 QB 792

Hobbs v  Marloucie (1977) 2All ER 241

To recoup by having the amount paid back. In the words of Brett LJ.in  Castellain v Preston.:”The doctrine of subrogation is another proposition which has been introduced in order to carry out the fundamental rule. It was introduced in favour of underwriters in order to prevent their having to pay more than a full indemnity…In order to apply the doctrine properly we must go into the full meaning of subrogation which is the placing of the insurer in the position of the assured in order fully to carry out the fundamental principles. We must carry the doctrine so far as to say that between the assured and the insurer, the assurer is entitled to every right whether on contract to fulfill or unfulfilled or on tort enforced or to any other right legal or equitable which has accrued to the assured whereby the loss can be or has been diminished. See Yorkshire Ins Co v Nisbett.

The principle of subrogation is embodied in section 79(1) of the Marine Insurance Act. See Rehemtulla and Premji v Bishen Singh  14 KLR 91 and John Kakonge v Orienta Fire and General Ins Co. (1965) EA 137

Scottish Union and National Insurance Co v Davis (1970) 1 LTR. The defendants damaged motor vehicle was handed over to O Limited for repairs with prior consent of the insurers. O Ltd made three unsuccessful attempts to repair the motor vehicle. The defendant who was dissatisfied took the motor vehicle away to another garage for repair. O Ltd sent a bill of 409 pounds to the insurance company who paid the amount without a satisfaction note signed by the defendant. Subsequently the defendant recovered 350 pounds in settlement of claims with third parties. The insurer claimed the 350 pounds under the principle of subrogation. However it was held that the insurer could not recover the amount as it had not indemnified the assured, hence subrogative rights could not arise. In the words of the  Russel J: ”You can only have a right to subrogation in a case like this when you have idemnified the person assured and one thing that is quite plain is that  the insurers have never done that”

In the case of Page v Scottish Ins. Corporation (1929) LJKB 308, the insurer has an right to institute legal proceedings in the name of the insured to enforce subrogative rights. See Mason v Sainsbury (1782) 3 Doug KB 61. However the action remains that of the insured and the defendant if held liable is only discharged by paying the insured. However in practice policies permit the insurer to use the insured to sue the insured for failure to avail his name for use. In such a case the insured is enjoined to the suit as one of the defendants. 

Until the insured is indemnified and in the absence of anything to the contrary in the policy he has the right to sue the wrongdoer and control the proceedings. As a general rule once subrogative rights exist or potentially exist for the benefit of the insurer the insured must not do anything likely to prejudice those rights. The wrongdoer cannot by way of defence allege that the plaintiff is an insurer and that the nominal plaintiff has been fully indemnified. See West of England Fire Ins Co v Isaacs (1897)1 QB 226.

In addition if an insurer exercising subrogative rights settles the insured’s claim against the wrongdoer and signs a discharge form with reference to all claims arising out of the relevant events such a discharge is binding. See case of Kitchen Design and Advice Ltd v Lea Valley Water Co (1989) 2 LLR 333

Subrogative rights are only exercisable in circumstances in which the insured has a right of action. However, an insurer may voluntarily waive his subrogative rights in certain circumstances. The waiver may be incorporated in the agreement between the parties if the insurer realizes a surplus after recovery of the amount paid by way of indemnity the same must be accounted to the insured. It therefore follows that as a general rule the insurer’s subrogative right extend only to the amount paid to the insured. See Nesbitt case.

Subrogation as a principle facilitates indemnity by insuring that the insured does not benefit from his loss.

Salvage

This is the recovery of by the insurer of the physical remains of the subject matter after indemnity. It is an integral part of subrogation and characterizes all contracts of indemnity. It is justified on the premise  that the value of the subject matter is included in the amount paid to the insured by way of indemnity. The legal effect of subrogation of salvage is that there is valid abandonment by the insured and the insurer is entitled to take over the interests of the insured in whatever remains of the subject matter.

Reinstatement

This is the repair or replacement of the subject matter in cases of partial loss. As a general rule indemnity contracts embody an option on the part of the insurer to reinstate the subject matter or pay indemnity for the loss. The insurer is bound to exercise his option within a reasonable time of notification of attachment of risk. The subject matter must be capable of being reinstated. Once the insurer has opted to reinstate he is bound by the choice.

In the case of Sutherland v Sun Fire Office (1852) LR 773 where after investigating a claim the insurer offered monetary compensation but the insured declined so was the offer to refer the matter to arbitration whereupon the insurer opted to reinstate but the insured objected. It was held that the insurer was in the circumstances entitled to reinstate.

Reinstatement must be full and adequate. The subject matter must be reinstated to the satisfaction of the insured. In Anderson v commercial Union Ins co, (1885) 85 QB 146. The court observed: “We have come to the conclusion that the words reinstatement and replace should thus apply. If the property is wholly destroyed the company might if they choose instead of paying the money replace the things by others which are equivalent and if the goods insured are damaged but not destroyed they may exercise the option to reinstate them, that is repair and put them in the condition in which they were before. Any loss or liability arising in the course of reinstatement is borne by the insurer.

In Alchome v Favill  (1825) LJ (OS) 47, the insurer opted to reinstate a building but after reconstruction the building was small than it was before and hence worth less. It was held that having made the choice to reinstate, the insurer was bound by the choice and was liable to make good the difference in the value.

The economic effect of reinstatement is to benefit the insurer by ensuring that he does not pay full indemnity when it is economically cheaper to reinstate.

Contribution and apportionment

Section 32 and 80 of the Marine Insurance

Proximate cause

Causa proxima non remota spectatur

According to Ivamy page 304:”Every event is the effect of some cause, it cannot however be treated as isolated. It is not an effect attributed solely to the operation of the cause working independently of everything else. It is necessary preceded and led up to by a succession of events, but for which it would not or might not have happened. Hence it is nothing more than the last link in a chain of causes and effects, which might be prolonged indefinitely into the past. The law however refused to enter into a subtle analysis or to carry back the investigation further than necessary. It looks exclusively to the immediate and proximate cause.”

In the words of Lord Bacon in “Maxims of Law”: ”It were infinite for the law to consider the cause or causes and their impulsions one after the other. Therefore it contented itself with the immediate cause. Therefore I say, according to the true principle of law we must look at only the immediate and proximate cause of death and it seems to be impracticable to go back ultimately to the birth of the person for it he had never been borne the accident could not have happened.”

The insurer is only liable where the loss or damage is proximately caused by an insured risk. The principle of proximate cause is common to all branches of insurance and is expressed by the legal maxim “Causa proxima non remota spectatur”.

This principle does not mean that the last cause is proximate. It is the cause which is more effective and dominant. Under section 55 of the Marine Insurance Act, the insurer is only liable for any loss proximately caused by a peril insured against. Proximate cause means the active and efficient cause that sets in motion a train of events which brings about a result without the intervention of any force started and working actively from a new and independent source. This is the cause  which is the more direct, dominant, operative or efficient in giving rise to an event.