Insurance
law
Introduction
The insurance contract is contract like any
other, but with particular peculiar principles. The insurance interest should
be beyond the control of either party and there must be an element of
negligence or that there is uncertainty. Contracts dealing with uncertain future events
are either alieatory, contingent or speculative. In insurance risk exists a
priori, whether or not we insure. However in a wager there is no insurable
interest.
It has been observed that the contract of
insurance is basically governed by 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 an extent that it is perfectly proper to
speak of the law of Insurance.
In the words of Collinvaux in Law of Insurance Pg 2.
“Insurance contracts also exhibit certain features which as
a matter of common law apply only to them”
Problem
of Definition
As a general rule
statutes dealing with the regulation of insurance business do not or have not
defined the contract of insurance to obviate the danger of excluding contracts
within or that should be within their scope. However a definition is essential
as insurance business is closely regulated.
In the
words of Ivamy, General Principles of
Insurance,
“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 the other person called the assured, a sum of
money or its equivalent on the happening of a specified event”
In the
words of John Birds, Modern Insurance
Law, Pg 13,
“It is suggested that a
contract of insurance is any contract whereby one party assures 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 Prudential Assurance CO. Ltd Vs Inland Revenue Commissioner [1904]2
KB 658 AT 663,
“A contract of insurance
then must be a contract for the payment of a sum of money or for some
corresponding benefit such as the rebuilding of a house or the repairing of a
shape 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”
The Judge further
observed that, “ it must be a contract
whereby for some consideration usually but necessarily for periodical payments
called premiums, you secure yourself some benefit usually but not necessarily
the payment of a sum of money upon the happening of some event”
Lord Clerk in Scottish Amicable Heritage Securities
Association Ltd Vs Northern Assurance Co [1883] 11 ER 287
It is a contract belonging
to a very ordinary class by which the insurer undertakes in consideration of
the payment of an estimated equivalent beforehand to make up to the assured any
loss he may sustain by the assurance of an uncertain contingency.
Other cases:
1. Robertson Vs Hamilton
[1811]14 East 522
2. Fuji Finance Vs Actria
Insurance [1994] 4 All ER 1075
3. D.I.I. Vs St.
Christopers Association [1974] 1 All ER 395
4. Medical Defence Union
Vs Department of Trade [1979] 2 ALL ER 421
5. Gould Vs Curtis [1913]
2 KB 84
6. Hampton Vs Toxleth
[1915] 1 Ch. 721
7. Re National Standard
Life Assurance Corp. [1918] 1 Ch. 427.
Essentials of an
Insurance Contract
1.
AGREEMENT
For a contract of
insurance to exist, there must be an agreement under which the insurer is
legally bound to compensate the other party or pay the sum assured [premium].
This is the consideration that passes between the parties to support the
transaction. It is asserted that premium is the considerations which the
insurers receive from the insured in exchange for their undertaking to pay the
sum assured in the vent insured against. Any consideration sufficient to
support a simple contract may constitute a premium in a contract of insurance.
2.
UNCERTAINTY
The insurance contract
is aleatory or contingent or speculative as it deals with uncertain future
events. For an event to be Insurable it must be characterized by some uncertainty.
In the words of Channel J in Prudential
Assurance CO. Ltd Vs Inland Revenue Commissioner “then the next thing
that is necessary is that the event should be one which involves some amount of
uncertainty. There must b either some uncertainty whether the event would 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 would happen”
3.
INSURABLE INTEREST
The insurable event
must be of an adverse nature .i.e. the insured must have an Insurable interest
in the property, life or liability which is the subject of the insurance.
Insurable interest is said to be the pecuniary or financial interest which is
at stake or in danger if the subject matter is not insured. It is a basic
requirement for the contract of insurance.
4.
CONTROL
The insurable event
must be beyond the control of the party assuring the risk. Re Sentinel Securities P.L.L [1996] I WLR 316
5.
ACCIDENTAL OR NEGLIGENT
LOSS
Insurance can only be
effected where 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 for payment of the sum assured. Toxleth Vs Hampton, Hall D. Ath Vs British Prudential Assurance
[1932]48 LT 240.
6.
RISK
This is the central
problem that insurance attempts to address. It is understood to mean that in a
given situation, there is uncertainty about the outcome and a possibility
exists that the outcome would be unfavorable. Risk has been defined as the
chance of loss, the probability of loss of loss or the probability of any
outcome different from the one expected. It is a condition in which there is a
possibility of an adverse deviation from a desired outcome that is expected or
hoped for. For individual proposes, risk is measured by the probability of loss
as the individual hopes that it would not occur.
The probability that it
could occur is used to measure the risk. However, where a large number of
exposure units- policies- exists, it is possible to predict the probability of
loss which is the probability of an adverse deviation from the expected
outcome. The standard deviation is used as a measure of risk. The higher the
probability of loss the greater the risk as the greater the possibility of loss
the greater the probability of a deviation from what is hoped for.
Risk differs from peril
and hazards. A peril is the cause of loss while a hazard is a condition that may
create or increase the chance of a loss arising from a given peril.
CLASSIFICATION OF RISKS
· Financial and
Non-financial
· Static and Dynamic
· Fundamental and
particular.
· Pure and speculative.
· Personal and business.
· Objective and subjective
1.
FINANCIAL AND
NON-FINANCIAL RISKS - the term risk, in its context, includes al those situations
in which there is an exposure to adversity.
Risk is financial where the adversity involves the financial loss and it is
non-financial where no financial loss is involved.
2.
STATIC AND DYNAMIC
RISKS – Dynamic
Risks result from changes in the economy e.g. changes in price levels, consumer
tastes, income and output, and technology may cause a financial loss to some
members. These risks may occasion financial loss to the population. However in
the long term, they benefit society as they are consequences of adjustments to misallocation
of resources. Dynamic risks occur without any precise degree of regularity and
are therefore less predictable.
Static risks are those which
involve losses whether or not there are changes in the economy e.g. dishonesty
of other individuals, perils of nature. They do not benefit society and are
generally predictable because they tend to appear over time with a reasonable
degree of regularity. They involve either a destruction of the asset or a
change in its possession and are thus not a source of gain to society.
3.
FUNDAMENTAL AND
PARTICULAR – Fundamental
risks involve losses impersonal in nature both in origin and consequence, that
is it is not caused by one individual and its impact generally falls on a wide
range of people. Examples of such risks include war, inflation, changing
customs, hurricanes, earthquakes and tidal waves. The first three arise out of
the kind of society we have and the last three are attributable to some
physical forces. A risk of an particular nature has its origin in its
individual events and its impact is felt locally. Accidental damages to
personal effects, theft of property and explosion of a boiler are examples of
particular risks.
4.
PURE AND SPECULATIVE
RISKS – a pure risk refers to that situation that may
result in one of two outcomes [a chance of loss]- either there is a loss or
there is no loss (breakeven). Pure risks can be classified as personal,
property, liability and risks arising from the failure of others. Speculative
risks describe circumstances in which there is a possibility of loss or gain
e.g. gambling and wagers. No benefit can
emanate from an exposure to pure risks. Damage to one’s car by accident is an
example of a pure risk. Either there is damage (i.e. an accident occurs) or
there is no damage (the car is not involved in an accident).
Speculative risk refers
to that situation that may result in one of three possible outcomes – either
there is a loss or there is no loss or there is a gain. Those whom buy shares
on the stock market face speculative risks. One may buy shares at shs 20 each
and a year later they may be only worth shs. 15. On the other hand they may no
have changed in value and could still stand at shs 20. Alternatively, they
could have risen in value so that one could sell them at shs 25 each and make a
profit.
Speculative risks are common in the business
world. Launching a new product, fixing retail prices, exporting to a new
market, etc are all forms of speculative risks because they hold the
possibility of making a loss, breaking even, or making a profit. Similarly,
pure risks are common. The factory may burn down, profit may be lost following
a fire, and stock may be stolen. Should they not occur, it wouldn’t mean that
the firm has gained. It would only have broken – even.
5.
PERSONAL AND BUSINESS
RISKS –
To wrap it up, we can also say that risks could either be personal or business
in nature. The former are those relating to an individual, for example,
premature death, dependent old age, sickness or disability and unemployment.
The latter are those relating to a business entity. They all have financial
implications that are undesired by the business firm. Examples include the
factory burning down, stock being stolen, production being hampered by strikes,
etc.
6.
OBJECTIVE AND
SUBJECTIVE- an example is loss of property by theft. This
risk is financial static, particular and pure in nature. Furthermore, it could
either be personal or business.
THE
BURDEN OF RISKS.
The loss likely to
arise in the evenyt of risk attaching is the primary burden of risk and hence
the need to caution oneself against such possibility. This uncertainty has led
to the evolution of various methods of handling risk e.g.
· Risk Avoidance – This
is the outright refusal by a person to accept risk. It is accomplished by
disengaging in the activity or venture that give rise to a risk. However it is
a negative approach to risk management.
· Risk Retention – is the
most common method of managing risk where the person takes no positive step to
address the problem. It may be voluntary or involuntary that the person does
not know.
Transfer of Risk
This is effected by its
transfer to another person willing to take the risk or to bear it e.g. Hedging.
Hedging is a method of risk transfer whereby a trader buys and sells goods for
future delivery cautioning himself against a decline or increase in the market
price. Insurance transfers the risk from the insured to the insurer in return
for a premium.
Risk Sharing
It may be accomplished
in various ways e.g. formation of a company where persons pool there
investments together and each member bears only a portion of a risk that the
enterprise may fail. Insurance deals with risk through sharing.
Risk Reduction
Is effected by the
adoption of loss prevention mechanisms e.g. Medicare, fire departments, burglar
proof, alarms etc.
Distinction between Insurance and Wagering
Contracts
A wager is a contract whereby two persons or groups with different
views on the outcome of an uncertain event agre that some consideration is to
pass depending on the outcome. The contract is speculative and contingent.
However it differs from insurance in various ways.
1. Wagers are generally
unenforceable whilst insurance contracts are enforceable.
2. The fundamental
distinction between insurance and a wager is the risk in that whereas in
insurance risk exists a priori, in a wager there is a deliberate assumption of
risk. In the words of Lord Ellenborough in Robertson
vs. Hamilton [1811] at p 533
“Although insurance and wagering contracts are both speculative
contracts, risk is the essence to the insurance contract and the assured and
the insured is made to effect the insurance contract because of the risk of
loss and does not create the risk of loss by the contract itself”
3. In wagering contracts
neither of the contracting parties has the interest other than the sum to be
won or loss depending on the outcome. Payment is dependant upon the event as
agreed to by the parties and is not paid by way of indemnity or otherwise. In
insurance, the insured has an interest of the subject matter in respect of
which he may suffer loss.
4. The uncertain event
upon which the uncertain event depends is prima facie adverse to the insured’s
interest and insurance is effected so as to meet the loss or detriment which
may be suffered on the happening of the event. In the words of Blackburn J in Wilson Vs. Jones [1867] L.R. 2 EX
139.
5. In wagers it is
essential that either party may win or lose depending on the outcome of the
uncertain event. In insurance, the insured pays a premium to furnish
consideration, it is not dependant upon the event insured against and the
insured cannot be called upon to contribute anything more, whether or not the
event occurs.
1st November
2004
Parties to an insurance
Contract.
Generally insurance
combines first and third party contracts. Most non-indemnity contracts are 1st
party whereas third party contracts are statutory. The insurer undertakes to
compensate third parties when risk attaches. However in all circumstances,
parties to an insurance contract are the insurer and the insured.
Insured- is the person
who takes out the policy and may be natural or juristic. A proposer for
insurance must have an insurance interest in the subject matter. Section 5 [1] of
the Marine Insurance Act, Cap 390 of the Laws of Kenya provides inter alia
“Every person has an insurable interest who is
interest in marine adventure”
Section 94 of the
Insurance Act Cap 487 of the Laws of Kenya is emphatic that,
“No policy of insurance shall be issued on the life or
lives of any person[s] 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.”
All persons with an
insurance interest may take out insurance policies. The question of unsoundness
of mind in insurance was considered in Joel Vs Law Union and Crown Insurance Co
[1908] 2 kb 863.
Insurer – Is the person
who undertakes to indemnify the insured or undertakes to pay the sum assured.
Generally there are three classes of insurance.
1. Insurance Companies
2. Underwriting Associations
and Brokers.
3. Insurance Agents
The history of
insurance practice lays more emphasis in the company as a central undertaking
in Insurance. The now repealed Insurance Companies Act maintained that
position.
Section 22 of the
Insurance Act,
“ No person shall be
registered as an insurer under the Act, unless that person is a body corporate
incorporated under the companies Act and at least 1/3 of the controlling
interest, whether in terms of shares paid up capital or voting rights as the
case may be as held by citizens of Kenya”
Section 23 of the
Insurance Act prescribes the minimum capital requirements.
In 1987 it was Kshs
5,000,000/=, today it is Kshs 50, 000,00/=. The minimum capital requirements
for General insurance is Kshs 100,000,000/= while for general and others is
Kshs 150,000,000/=.
Insurance
Brokers
Section 2 [1] Insurance
Act, provides that a broker is an intermediary concerned with the pacing of the
insurance business with the insurer or re-insurer for or in expectation of
payment by way of brokerage, commission, fee, allowance, return or otherwise
for or on behalf of an insurer, policy holder or proposer for the insurance or
Re-insurance. A broker is a person who promises to place insurance business
with the most competent insurer or re-insurer. Broking I insurance has a long
history traceable to the Lloyds of London Association.
Insurance
Agents
Section 2[1] of the
Insurance Act, defines an agent as a person who being a salaried employee of an
insurer who in consideration of a commission solicits or procurers insurance
business for an insurer or broker.
An insurance agent commits
both parties to the transaction. At common law, an insurance agent is the agent
of the insured, if the proposer engages him to complete the proposal form. This
is justified on the doctrine of non-disclosure which assumes that the proposer
is in control of the material fats affecting the subject matter. Consequently
any incorrect statements affect th4e proposer adversely.
However in cases of
active fraud, the agent is deemed to be the agent for the insurance company.
· Hughes Vs Liverpool Victoria Legal Friendly Society[ 1916]
2 KB 482
· Harse Vs Pearl Life Assurance Co. Ltd [1904] 1 KB 558
Are premiums
recoverable where there is no insurable interest?
In the first case the
premiums were recoverable. in the second case both parties were not aware or did
not know whether there was an insurable interest in “ pari delicto’
Harse Vs Pearl Life Assurance Co. Ltd [1904] 1 KB 558
Where the policy is
illegal, the premium cannot be recovered if the insured is in pari delicto with the insurers. The
plaintiff was induced to insure his mother’s life by the insurer’s agent’s
innocent misrepresentation that the policy would be a valid one. The policy was
illegal under the Life Assurance Act 1774, Sec 1since the plaintiff had no
insurable interest. The plaintiff sought to recover the premium which he had
paid. It was held by the Court of Appeal, that the premium was not recoverable
because the parties were in pari delicto.
Moreover it was found that there was no mis-statement of fact nor fraud on the
part of the agent. That there was non greater impropriety on the part of the
agent than there was on the part of the plaintiff.
Under the provision of
the Insurance Act 1881 of England. Insurance Agents are deemed top be agents of
the Insurer, and in the event of fraud, the insurer is liable.
O’Conner Vs B.D.B Kirby and Co and Another
[1971] 2 ALL ER 1415.
The proposer who owned
a motor vehicle took out an insurance policy through the defendant insurance
broker. He supplied the necessary information and the broker completed the
proposer form. In response to one question, the proposer indicated that he had
no garage and that the motor vehicle would be parked by the side of the road.
The broker indicated on the proposer form that the motor vehicle would be kept
in a garage.
The proposer signed the
proposer form without detecting the mistake and a policy was subsequently
issued. The insured lodged a claim and the mistake was discovered. The insurer
repudiated liability whereupon the insured sued the broker in damages for the
loss suffered on the ground that the broker had breached his contractual duty
to complete the proposal form correctly.
Held: The broker was
not liable in that, first, 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 or ought not to sign it if it is inaccurate. As it was the insured’s duty
to confirm the contents of the form, the effective failure of the loss is his
failure to do so.
Davis L.J. Said at 1421
“It was the duty of the insured to read this form. It was his
application, he signed it and if he was so caress as not to read it properly,
then in my opinion, he has himself to blame”
however under section
81[2] of the Insurance Act, where an agent or servant of an insurer writes or
fills in a proposal form 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.
Nature and Operation of Insurance Mechanism.
Insurance may be
described as a social device whereby a large group of individuals or companies
through a system of equitable contribution 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 otherwise would fall upon an
individual 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 members suffers loss by the occurrence of the risk [event] insured
against. The payment - individual contribution to the pool is the premium.
Role of Insurance
Conventional insurance
writers have observed that insurance has two basic roles.
1.
The transfer and
shifting of risk from an individual to a group.
2.
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. Arguably therefore, insurance is
an economic device whereby the individual substitute a small certain cost for a
large and uncertain financial loss in the future which could exist or arise but
for insurance.
In practice the
Insurance mechanism anticipates the possibility of organizing individuals into
a homogenous group exposed to the same risk. Insurance companies employ two
mechanisms to group individuals into homogenous groups.
1. Law of large numbers,
averages or probabilities
2. Posterior or empirical
probabilities.
Law of Large Numbers.
Is based on the
likelihood of an event taking place
and makes predictions on the likelihood of such event happening on the
assumption that the happening of the event can be predicted with certainty. It
operates on the premise that the observed frequency of nay event approaches the
underlying probability as the number of trials approaches infinity. Hence the
greater the number of exposure units [risks], the greater he certainty.
Posterial or Empirical Probabilities.
Under posterior or
empirical probabilities, acturial scientists determine the probability of risk
attaching by the reference to the past and 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 which can be valued (valuable), monetary or otherwise.
2) The thing in which he has interest is subject to
loss by a peril.
3) A substantial number of
other persons have an interest in
similar things subject to loss by similar perils.
4) The chance of loss from
the peril can be measured or measurable with
some degree of certainty or accuracy.
5) The desire by enough
persons or members of the group to share each others loss.
6) The loss or losses
resulting from the insured risk must be definite and predictable in financial
or pecuniary terms.
7) The loss must be
tortuous or accidental.
8) The loss must not be
catastrophic in aggregate.
9) The cost of insurance
must be economically feasible (managerial premiums).
8th November
2004
Historical Development of Insurance
According to John Birds: the origins of modern insurance
contracts are to be found in the practices adapted by Italian Merchants from
the 14thC though the concept of insuring is an ancient one. Maritime
risks i.e. loss of ship and cargo at sea led to the practice of medieval
insurance dominated insurance for many years. The practice of insurance spread
to London in the 16thC. Originally there were no separate insurers.
A group of merchants would agree to bear their risks among themselves.
Insurance business in
England developed alongside the Lloyds exchange of London which was chartered
in 1570. By it incorporation the exchange was a meeting place for merchants
involved in commercial transactions with time, the merchants realized that
every transaction had a risk element and hence the need to cushion themselves.
Marine Insurance
This is the oldest form
of insurance which was for many years transacted at the Lloyds coffee house.
The earliest forms of insurance contracts were known as remissions or loons on
Bottomy or Bills of Obligations. A merchant could borrow money either by a
public subscription or privately for the purpose of purchase of goods or
shipment and the amount was payable at fixed rate of interest if the cargo
arrive safely and nothing was payable in the event of loss. This system of
insurance imposed a heavy burden on lenders and was unsatisfactory for
commercial purpose.
In marine insurance,
the practice was that a merchant wishing to insure would pass a slip of paper
on which the particulars of the ship and its cargo were written to people
desirous of providing insurance and those willing to accept a portion of the
risk thereof, would initial the slip when the entire amount of insurance was
underwritten, the contract was concluded.
For many years, common
law played an insignificant role in the resolution of the disputes relating to
insurance. This however changed with the appointment of Lord Manisfield as
Chief Justice in the mid 18th century and by the latter half of the
century the jurisdiction of courts of an insurance matter had been established.
The principle developed
in relation to marine insurance has by and large been applied to other
categories of insurance. Medieval insurance was closely associated with
banking. Attempts were made during the 13th century to separate the
two traders in Venile Geneva where risk was developed. Carrier or bill of
lading or as a bond which developed with insurance transaction exclusively. Its
mode of operation was that a merchants could say a specific sum of money in
advance and the value of the goods in question was payable in the event of
lesser destruction.
In 1574, a chamber of
insurance was established at the Royal Exchange of London. This was a
specialized section devoted to insurance transactions and by 1575 insurance
contracts had been standardized and subject to resign. These developments were
necessary to discourage fraudulent practices by insurers with insecure
financial base.
The chamber of
insurance and the raging insurance policies registered in Act of 1601. this
statute created a special court to adjudicate insurance matters because by
statute and an insurance was underwritten by individuals at the Lloyds of
London. The South Sea Bubble scan of 1720 revealed the dangers of an
unregulated business and this led to the enactment of the South Sea Bubble Act.
It also led to the incorporation of two insurance companies i.e. the Royal
Exchange Assurance Corporation or Marine insurance and the London Assurance Corporation.
The London Fire
Assurance Company was the 3rd company and was incorporated in 1772
after the great London fire. Since then significant attempts have been made to
regulate the insurance industry by legislation i.e. by the passage of the
Marine Insurance Act of 1746 and the Life Assurance Act 1774. These
developments led to the codification of Marine Insurance Act 1906.
[Some Text missing]
19TH
November 2004
Nature
and Scope of the Insurance contract
Formalities – common
law did not suggest that we should have an insurance contract to be in any
specific form. See Jupiter General
Insurance Co. Vs Kassanda.
The contract of
insurance must satisfy basic requirements of a contract at common law, it must
be characterized by an offer which is unequivocally accepted and consideration
must be furnished. The parties must have intended there dealing to be a legally
binding agreement. A contract of insurance must be in writing by some note or
memorandum. However, this was not the requirement. At common law parole
contract of insurance was enforceable.
1. Jupiter General
Insurance Co. Vs Kassanda.
2. Murfit Vs Royal
Insurance Co. [1922] TLR 334
3. Ackman Vs Policy
Holders Protection Board [1992] Lloyds Reports 321.
Marine Insurance
However marine
insurance must be written.
Section 22 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
this Act. Under Section 23 of the Marine Insurance Act, the contract of marine
insurance must specify the name of the assured or the person who effect the
policy on his behalf, the subject matter of insurance and the risk insured
against, the insurance duration, the sum[s] insured and the names of the
insurers.
Under Section 24 of the
Marine Insurance Act, a contract for marine insurance must be signed by or on
behalf of the insured. Life, fire and
other types of insurance are not generally subject to any formalities. However,
under the provisions of the Stamp Duty Act, a stamp duty in print must be fixed
on the face of every policy without which the policy is inadmissible as
evidence. Failure to fix the imprint renders the insurer liable to a fine not exceeding
Kshs 2000/=
In the contract of
insurance the offer is made by the proposer by completing and submitting the proposer
form to the insurer. The offer must be as complete as possible in materiality
setting out the type of contract and other necessary details. It must be
communicated to the insured. The proposal form is standard and so are the terms
and are subject to minimum negotiation. The insured [proposer] must have
insurable interest.
The bargain element
cases include.
1. ReYager Vs Gurdian
Association Co. [1912] 108 MT 38
2. Stir Fire and Burglary
Insurance Co. Vs Davidson [1902] 5 AC 38
3. Interfoto Picture
Library Vs Sulhoute Visual program [1989] QB 432
4. Rust Vs Abbey Life
Assurance Co [1979] 2L.R. 334 (Lloyds)
PROPOSAL FORM
This is document
furnished by the insurer for completion by the proposer. It varies I form and
content depending on the contract applied for. It solicits specific information
pertaining to the proposer and subject matter. It generally seeks information
relating to;
1. Name, postal address,
occupation and residence of the proposer as well as the location of the subject
matter.
2. The risk or risks to be
insured where the proposer does not seek an all risk policy. The duration of
the cover must be specified and must be specific.
3. Circumstances affecting
the risk. These are circumstances peculiar to the subject matter as they
determine the scope of the risk to be undertaken.
4. The history of the
subject matter; I.e. whether the risk has previously attached, previous insurance,
refusals if any, including any cancellation. In addition the proper depose that
the information provided is true and forms the basis of the contract between
the parties. This is refereed to as the basis of the contract clause.
This information
enables the insurer to make a fair decision whether or not to insure the risk
and how much premium to charge
22nd
November 2004
Signification
of Acceptance of a Policy.
The submission to the
insurer of a duly completed proposal form by the proposer constitutes the
formal offer to contract. In an indemnity contract, insurers often extend
temporal cover to the proposer between submission of the proposal form and its
formal acceptance or rejection. This is the cover note. This is a technical
term used by issuers to describe the temporal insurance cover extended to the
proposer during the interim period between submission of the proposal from and
its formal acceptance or rejection.
1.
The note may be justified on various grounds.
Firstly before cover is extended time and care must be taken to access and
ascertain the risk being undertaken.
2.
It is argued that the insurance industry is rigid
and formal and hence the need for more time.
3.
As explained in Julian Bright Vs H.G. Poland [1960] Lloyds Rep. 420, the typical
motorist is an impatient person and demands cover before the traditional steps
are complied with. The cover note need note be a formal document. It is
siufficient if the insurer intimates to the proposer that cover has been
extended from a particular date.
Murfit Vs Rayal
Insurance Co. Ltd
[1922] 38 TLR 334
It was held that a
letter from the head office of the company stating that cover had been extended
in a particular situation constituted a cover note. The cover note operates as
a contract of insurance between the insurer and the proposer on the terms and
conditions therein embodied or necessarily implied from the nature of the
policy applied for. The proposer is entitled to indemnity in the event of
attachment of risk during the subsistence of the cover note if the document is
comprehensive. The proposer recovers on the basis of its terms and conditions.
· Jadavji Shamji Panday
Vs Oriental Fire and General Insurance Co [ 1957] EA 21
· General Re-Insurance
Case [ 1982] QB 1022
· Stockton Vs Mason
[1978] Lloyds Rep. 430
The legal effect of the
cover note lapses when the insurer issues a policy or communicates his
rejection of the proposal form. The effect of the policy is backdated to the
date of issue of the cover note. The cover note is ordinarily effective for 30
days.
Section 75 of the Stamp
Duty Act, provides that a policy should be issued within 30 days of the receipt
of the proposal form. However in practice, the duration of cover note varies.
If the insurer refuses to take the risk, he must notify the proposer, failing
which over note remains effective and the insurer is liable should the risk
attach as was the case in
Cartwright Vs Mac
Cormick Trafalgar Insurance
[1963]1 ALL ER 11.
The English Companies
Act observed inter alia that an
insurer must actually signify his rejection of the proposal form expressly in
order to bring an end the binding nature of the cover note. Acceptance of the
proposal form is the prerogative of the insurer. However an insurer is not
obliged to accept any proposal from and in the vent of a refusal, he is not
bound to assign any reasons. However the insurer cannot while accepting the
proposal from vry or modify its terms without the proposer’s concurrence.
1. Canning Vs Farquhar
[1886] 16 QBD 727
2. General Accident
Insurance Corp Vs Cronk [1901] 17 TLR 334.
Acceptance of the
proposal form may be signified in various ways.
1. Formal Communication –
this is an express intimation by the insurer to the proposer that it has
accepted the proposal form.
2. Issue of policy – as a
general rule issue of a policy is conclusive intimation of acceptance of the
proposal form. The policy becomes legally effective on the date of issue
notwithstanding any defects in the proposal form.
McElroy Vs London Assurance Corp. [1894] 24 Lloyds Rep. 287.
Where
the proposer had not signed the proposal form but the insurer issued a policy,
a subsequent attempt to csancel the policy on the ground of the defect failed.
It was held thet the policy was binding as its issue was evidence that the
company had studied, considered and accepted the proposal form.
Pearl Life Assurance Co
Ltd Vs Johnson [1909] 2 KB 88.
However issue of policy
does not amount to an acceptance where
· The proposer does not
treat it as such but continues negotiating fro purposes of obtaining a
modification of its terms.
· The policy departs from
the proposal form by introducing fresh terms and thus amounts to a counter –
offer.
3. Acceptance of premium –
the acceptance and retention of premium raises presumption in the absence of
any circumstance leading to a contrary conclusion that the insured had accepted
the proposal form. In such a case, the insurer is bound to issue a policy and
make good any loss arising.
In the words of Lord Mc
Laven at Page 291 in McElroy Vs London Assurance Corporation
“The company is not
bound to deliver a policy without payment of the premium. If they accept a
premium before delivery of a policy, I should be disposed to hold that the
acceptance of the premium and the delivery of the receipt thereof was
sufficient to create the obligation to issue a policy. Unless circumstances can
be shown to the contrary, the receipt of the premium offered and its retention
at once create a contract of insurance.”
· Re Economic Fire Office [1896] 12 TLR 142
· Harrington Vs Pearl Life Assurance Co. [1913] 30 TLR 24
4. Conduct of the Insurer
– the fact that premium has not been paid nor the policy issued does not
necessarily mean that the proposal from has not been accepted. Evidence may
clearly show that it has been accepted and that there is a binding agreement
between the parties. On the part of the proposer to pay the premium and on the
part of the insurer to issue the policy in which case the insurer cannot refuse
to accept the premium when tendered or repudiate the contract.
1.
Thompson Vs Adams
[1889] 23 QBD 361
2.
Adie and Sons Vs Insurance
Corporation Ltd [1898] 14 TLR 544.
3.
Re Yager [1912] LT 38
4.
Jupiter General
Insurance Company Vs Kassand Cotton
5.
White well Vs Auto Car
Fire and Accident Insurance Co. [1927] 27 Lloyds Rep. 41
Under Section 21 of the
Marine Insurance Act, a contract of
Marine Insurance is deemed concluded when he proposal of the insured is
accepted by the insurer.
Acceptance of the
proposal form marks the end of the proposer’s duty to disclose material facts
and the insurer cannot generally avoid the contract for the non-disclosure of
facts coming to the proposer’s knowledge thereafter.
Commencement of the Insurance Cover.
Commencement of cover
determines the time from which the insurer is bound to indemnify the insured or
pay the sum assured should the risk attach. Indemnity contract ordinarily run
fro one year while the duration of non-indemnity contract is determined by the
parties.
The date and time of
commencement of cover is critical as it determines the commencement of the parties’
obligations. As a general rule, cover commences at the time and date prescribed
by the policy or cover note. However, if the document is silent as to the time
or is ambiguous, cover commences at the beginning of the next full day.
A full day is a period
of twenty four consecutive hours from midnight. In
Cartwright Vs Mac Cormick Trafalqar Insurance Co. Ltd
An insurance co. issued
a cover note to a motorist showing the effective time and date of commencement
as 11.45 AM. On December 1959. the not efurther stated.
‘ This cover note is
only valid for 15 days from the commencement 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 nay event the duration of the
cover note shall not be more than 15 days from the date of commencement stated
herein”.
The motorist was
involved in an accident at 5.45 pm on December 17, 1959, 15 dasy and 6 hours
after the commencement of the cover.
It was held that the
insurance company wads liable to indemnify the insured. The court was of the
view that on the true construction of the cover note, the descriptions, date
and time of commencement were used as separate terms and the term ‘commencement
date’ and date of commencement were synonymous with the day of commencement and
consequently the 15 days read from the midnight of the commencement date.
The decision in this
case was also justified on common law. In the words of Harman L.J. pg. 14 and
15;
“These cases seem to me
to show that generally speaking when a day 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 date.”
In the words of Wilmer
L.J
“There is abundant
authority going back at least to Lord Mansfield’s day for the proposition that
in calculating a period of time, within which some acts must be done or after
which it may not be done, fractions of the day are ignored.”
Cases on the day and date
argument include;
· Hayman Vs Downs [1942]
AC 356
· Stewart Vs Chapman
[1951] 2 ALL ER 613, [1951] 2 KB 792
· Hercules Insurance Co.
Ltd Vs Trivedi and Co. Ltd [1962] EA 348
· Cornfoot Vs Royal
Exchange Association Corporation [1904] 1 kb 40
Termination of Insurance Contracts.
Termination of an
insurance contract limits the obligations of the parties thereto. Insurance
contracts may come to an end or terminate in the following ways:
1. Payment of the sum
assured or total indemnity when risk attaches – in property insurance, total
indemnity discharges the contract while in non-indemnity contracts, payment of
the sum assured when risk attaches or on maturity discharges the contract.
Reinstatement fro partial loss does not terminate the contract.
2.
Agreement or mutual consent – parties by mutual consent may
at any time agree to cancel the policy thereby terminating the contract. The
parties’ mind must be at Idem.
Reyner Vs Hall
[1813]
4 Lloyds Rep. 12
In life insurance the
insured is entitled to the surrender value of the policy. Under section 89 of
the Insurance Act, if an insured surrenders a policy to the insurer, he is
entitled to a partial reimbursement of up to 2/3 of the total premiums paid
inclusive of interest and bonuses payable provided he has been a bona fide
insured fro at least 3 years.
In indemnity contracts,
surrender of the policy before the end of the year, entitles the insured to its
surrender value.
3.
Breach of warranty [conditions]- an insurer may apply to the court for
cancellation of an insurance policy for breach of a condition or warranty by
the insured e.g. non-disclosure of material facts or misrepresentation of
facts. In Jubilee Insurance Co Vs John Sematengo [1965] EA 233 The plaintiff Insurance Co. filed an action against
the defendant for a declaration that the co. was entitled to avoid a motor
insurance policy on the ground that the same 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 of the insurance had been involved in an accident the
day before it was insured and that it had a major mechanical defect.
It was held that the
insurance co. was entitled to avid the contract. In the words of Sir Udo Udoma
“The
plaintiff co. 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
misrepresentation of facts which was false
in some particular.”
1.
The Motor Union
Insurance Co. Ltd Vs. A.K. Ddamba [1963] EA 271
4.
Operation of Law- an insurance contract
terminates if circumstances render its sustainability impossible e.g.
Liquidation or winding up of the insurer fro indemnity contract or sale or
transfer of the subject matter. In;
Kinyanjui Vs South
India Insurance Co. Ltd
[1968] EA 160
The plaintiff had
obtained judgment under the Fatal Accidents Act, Cap 32 Law s of Kenya, against
the driver and alleged owner of the bus. The insurance co disclaimed liability
on the ground that though the alleged owner had taken out a policy, the bus was
being operated by a company to which it had been transferred and hence the
alleged owner had no insurance interest. It was held that since the company
owned and operated the bus and had engaged its own driver, the company alone
had an insurable interest in the bus. The transfer of the bus to the company
terminated the insurance cover hence there was no cover at the time of the
accident.
Peters Vs General
Accident and Life Assurance Co. Ltd [1937]
4 ALL ER 628
5. Lapse [Effluxion of
time] – indemnity
contracts run for a year and on expiry of their duration unless renewed by
mutual consent.
Classification of Insurance Contracts
Insurance contracts may
be placed or classified into broad categories.
1. By nature of event by
which the sum becomes payable – this classification places the insurance
contracts into categories such as Marine, Fire, Life etc. it places emphasis on
the homogeneity of the group.
2.
Nature of the interest affected – this classification
places insurance contracts into three broad categories namely;
· Personal insurance e.g. life, accident, fidelity etc.
· Property insurance e.g. fire, marine, motor, solvency.
Crop, hypothecation etc.
· Liability insurance where policies are taken out in
compliance with statutory provisions e.g. the compulsory third party motor
insurance, workman’s Compensation, NSSF, NHIF
3. Nature of contract of
insurance – a contract of insurance may be an indemnity or non-indemnity. An indemnity contract is a contract of
insurance where the insured pays a premium on the understanding that in the
event of loss, he will be indemnified for the actual loss sustained. He must be
restored to the position he was before the loss.
Dalby Vs India and
London Assurance Co.
[1854] 15 CB 361.
It was observed that
policies of insurance under fire and Marine risks are properly speaking
indemnity contracts i.e. the insurer engages to make good within limited
amounts, the losses sustained by the insured and nothing else.
A non-indemnity insurance contract is one in which the
insured secures the payment of a fixed sum of money, previously determined as
the value of the subject matter of insurance. There is an assurance that the
amount is payable should risk attach e.g. of life policies.
4.
By nature of the
program of insurance – insurance programs are either private or social. Private
insurance is generally optional and voluntary and is effected on the premise
that the insured stands to loose should risk attach.
Social insurance is compulsorily imposed upon the assured by
statute to protect the society from a hazard which no single individual can
cushion it. The individual must guard against such risks as well as the
activities giving rise to the risk as it is beneficial to the society. Hence
those involved must contribute to cushion those likely to be affected e.g.
compulsory third party Insurance.
Social insurance is said to be a device of pooling of risks by
their transfer to an organization under an obligation to provide pecuniary
benefits or service to or on behalf of the insured on the occurrence of the
event e.g.
· Compulsory third party
motor insurance
· N.H.I.F.
· N.S.S.F
· Workman’s compensation.
5.
Whether insurance is
direct or re-insurance – Re-insurance takes place when an insurer who has already
undertaken to indemnify the insured or pay the sum assured insures himself
against the same risk with a re-insurer. Reinsurance is a 2oth century practice
which evolved to cushion the insurers against the insolvency. Re-insurance may
be optional or voluntary.
Kenya Re- insurers are bound to insure up to 10 % with PTA
Reinsurance and up to 5% with the African Re-insurance Corporation. However, an
insurance co. is free to re- insure up to 100%.
Role of Re-insurance
· Re-insurance assists in
the distribution and transfer of economic processes from one company to another
which benefits the economy.
· It also generates the
making good of losses in the event of insolvency.
· It also ensures that
insurance companies invest part of their accumulated funds locally.
Interpretation of Insurance Contracts.
In the words of Ivam in
General Principles of Insurance Law;
“The construction of a
policy of insurance is a question for the court, when words in a policy have
once been judicially interpreted, they would be construed in the same way,
should their meaning be in a subsequent case, but when words have not been
previously interpreted, the court is guided by certain principles of general
application, the size of print, in insurance policies is immaterial.’
1.
Application of the
doctrine of precedent.
– generally where courts have already decided 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 Parke B in ;
a) Glen Vs Lewis [1853[8
Ex Ch 67
“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.”
b) Louden Vs British Merchants Insurance Co Ltd
[1961] 1 Lloyds Rep 155
An assured under a
motor insurance policy was killed in an accident. There was no doubt that he
was drunk at the time. The insurance co. sought to avoid liability on the
ground that he had died on bodily injury sustained whilst under the influence
of drugs of intoxicating liquor, liability for which was excepted [not covered]
under the policy. It was held that since the words were not uncertain as to their
meaning and effect, they had to be interpreted as they were in previous cases
and the insurer was not liable.
c) Lawrence Vs Accidental Insurance Co Ltd [1881] 7 QBD 216
However in the words of
Atkin L.J. in
d) Re Calf and Sun Insurance Office
[1920] 2 KB 366 at 382
“On a question of
construction, I protest against one case being treated as an authority in
another unless the language and circumstances are substantially identical”
e) Dino Services Vs Prudential Assurance Co. Ltd
[1989] 1 ALL ER 422
2.
Intention of the
Parties – it
is a fundamental rule of construction that the intentions of the parties
prevail. Such intention is discernible from the policy itself and other
documents relied upon by the parties. Courts are discouraged from speculating
but reference to surrounding circumstances may be made e.g. a previous
construction.
3.
Policy must be
interpreted as a whole [ wholistic Rule] – a court of law must interpret an
insurance policy in its entirety. All words an phrases must be interpreted and
none must be rendered meaningless without good cause. As a general rule a
policy should be interpreted to give all clauses a positive meaning so as to
give effect to the intentions of the parties.
Hamlyn Vs Crown Accidental Insurance Co.
[1893] 1 QB 750
The insured had
effected insurance against poultry injury caused by violent, accidental,
external and visible means. A clause exempted the insurer from liabilities in
respect of injuries arising from “natural disease or weakness or exhaustion
consequent upon disease.’
The insured had stooped
to pick up a mango dropped by a child and dislocated and injured cartridge of
his knee. The insurer contended that there was no external or visible means
which caused the accident and that it was not liable. It was held that the word
‘external’ was to be contrasted with internal causes of injury such as disease,
mentioned in the clause, hence the injury was caused by external means and the
insured would recover.
In the words of Atkin
L.J., ‘You must look at the document as a whole’
As a generals rule,
similar words or phrases bear the same meaning throughout the policy.
4.
Ordinary Meaning – Words and phrases in a
policy should be given their ordinary or natural meaning while sentences should
be accorded their ordinary grammatical meaning. This rule is justified on the
premise that insurance practices and usages evolved.
a)
Leo, Rapp Ltd Vs Mc
Clure
[1955] 1 Lloyds Rep. 292
Stocks of metal were
insured against theft whilst in warehouse anywhere in UK. Some metal was loaded
into a lorry parked in an open space in a locked compound enclosed by a thick
wall toped by barbed wire and was stolen. It was held that the loss was not
covered by the policy as the compound did not constitute a warehouse. In the
words of Devlin L.J.
“When the court is
construing words in an insurance policy, it must give them their ordinary
natural meaning.
b) Thompson Vs Equity Fire Insurance Co.
[1910] AC 592, 103 LT 153
The words must be
construed in their ordinary meaning. A building which was destroyed by fire had
been insured under a policy which exempted the insurance company from liability
for loss while gasoline was stored or kept in it. The fire was caused by a
small quantity of gasoline in a stove used for cooking purposes. No other
gasoline was used in the building. It was held by the judicial committee of the
Privy Council, that the insurance company was liable. The words “kept or
stored’ must be construed in their ordinary meaning. They implied a
considerable amount of gasoline or at least keeping it in stock fro trading
purposes.
Lord MaCnaghten at pg 154 said;
“What is the meaning of
the words ‘stored or kept’ in
collocation and in the connection in which they are found they are common
English words with no precise or exact signification. They have a somewhat
kindred meaning and cover very much the same ground. The expression as used in
the statutory condition seems to point to the presence of a quantity not
inconsiderable or at any rate not trifling in amount, and to import a notion of
warehousing or depositing for safe custody or keeping in stock fro trading
purposes. It is difficult, if not impossible, to give an accurate definition of
the meaning, but if one takes a concrete case, it is not very difficult to say
whether a particular thing is ‘stored or
kept’ within the meaning of the condition. No one probably would say that a
person who had a reasonable quantity of tea in his house fro domestic use was ‘storing and keeping’ there, or [to take
the instance of benzene, which is one of the prescribed articles] no one would
say that a person who had a small bottle of benzene for removing grease spots
or cleansing purposes of that sort was ‘storing or keeping’ benzene.
Some meaning must be
given to the words ‘stored or kept’.
Their Lordships think those words must have their ordinary meaning. So
construing them their Lordships come to the conclusion that the small quantity
of gasoline which was in the stove for the purpose of consumption was not being
‘stored or kept’ within the meaning
of the statutory condition at the time when the loss occurred.”
However technical
meanings must not be resorted to unless necessary to amplify the ordinary
meaning of words or phrases. Nevertheless, technical words or terms must be
accorded their technical meaning while technical legal terms must be given
their strict technical meanings.
London and Lancashire Fire Insurance Co Vs Bollands.
[1924] AC 836.
Technical legal words
must be given their strict technical meaning.
A burglary policy
relating to premises as a bakery excluded the liability of the insurance
company if loss or damage resulted from “a
riot”. Four armed men held up the employees with revolvers and seized money
in a cashier’s office. There was no other disturbance at all in the
neighborhood. It was held by the House of Lords that the Word ‘riot’ was used
in its technical legal meaning and the action of the armed men constituted “a riot.” Consequently the insured could
not recover under the policy.
Lord Sumner at 648
stated;
“It is true that the
uninstructed layman probably does not think under the word ‘ riot ‘, of even
such a scene, as described in the cases stated. How he could describe it I know
not, but he probably thinks of something, if not more picturesque, at any rate
more noisy. But there is no warrant here for saying that when the proviso uses
a word which is emphatically a term of art, it is to be confined, in the
interpretation of the policy, to circumstances which are only within the
popular notions on the subject and are not within the technical meaning of the
word. That clearly must be so with regard to martial law, that I think, must be
so with regard to acts of foreign enemies; and I see no reason at all why the
word ‘riot’ should not include its technical meaning as clearly as burglary or
house-breaking do.”
5.
Ejusdem Generis Rule – where specifications of
particular things belonging to the same genus precede a word of general signification,
the latter word is confined in its meaning to things belonging to the same
genus and does not include things belonging to a different genus. This rule is
applied in circumstances in which a policy is not exhaustive.
a) King and Travelers Insurance Association Ltd
[1931] 48 TLR 53
Where specifications of
particular things belonging to the same genus precede words of general
specification, the latter words are confined in their meanings too things
belonging to the same genus only. This is known as the “ ejusdem generis rule”.
A policy of insurance
against accidental loss of baggage contained a clause stating “jewelry,
watches, field glasses, cameras and other fragile or specially valuable
articles must be separately declared and valued”. The insured claimed for the
loss of a Persian lamb fur coat which had not been separately declared and
valued.. It was held by the King Bench that the fur coat was not a fragile and
a specially valuable article requiring to be separately declared and valued and
that the ejusdem generis rule applied.
Rowlatt J stated that Furs are commonplace
articles of dress in the case of nearly every woman of any sort of comfortable
means at all. The circumstance that they afford a great scope for extravagance
and vanity, so that you can get furs of fantastic price, does not mind, show
that being commonplace articles of dress they are specially valuable in the
same sort of way that jewelry, watches, field glasses and cameras are.”
b) Mair Vs Railway Passengers Association Co Ltd
[1877] L.T.R. 356.
A Clause in life policy
excluded the insurer from liability if the insured met his death as a result of
a wide variety of causes and different from those provided by caariages or
entering or leaving a carriage in motion or riding races or stipple chases or
generally by his willful exposing himself to any unnecessary danger or peril.
The insured accosted a
woman in the street and was knocked down by the man in whose company she was
and died as a result of injuries inflicted upon him. It was held that the
insurance company could not rely on the exclusion clause as what happened could
not be considered to be ejusdem generis
with the perils enumerated in the clause.
6.
Contra Proferentem Rule
– this
rule is generally applied to interpret standard form contracts if the words,
phrases or sentences in a policy are vague or ambiguous, they should be
interpreted, contra-proferentes i.e. restrictively against the party relying on
them. It has been observed that’
“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 has inserted the warranty for his own protection”
Houghton Vs Trafalgar Insurance Co. Ltd
[1953] Lloyds Rep. 503, [1953] 2 ALL ER 1409, [1953] 3 WLR 985
or [1954] 1 QB 247
A motor insurance cover
not excluded “loss, damage and or liability caused or arising whilst the car is
conveying any load in excess of that for which it was constructed”. The vehicle
was carrying a driver and 5 passengers. The insurer contended that it was not
liable in that the car was conveying a load “in excess of that which it was
constructed.” It was held that the company was liable. In the words of
Somervell LJ,
“If there is any ambiguity, it is the company’s clause and the ambiguity
would be resolved in favor of the assured”
a) English Vs Western
[1942] KB
Where a policy contains
conflicting words; phrases or sentences, the court must reconcile them so as to
give the policy a positive legal meaning. Where the conflicts re irreconcilable
then written words if any must prevail over printed ones. This is illustrated
by;
b) Yorkshire Insurance Co. Vs Campbell
[1917] AC 218.
Express terms override
implied terms with which it is inconsistent. Where all terms are printed, the
latter terms are given more effect than the former as they may have been
intended to qualify the former. Where contractual terms are written, the
general rule, parole evidence is inadmissible to vary, change or explain such
terms. However, such evidence may be admissible to show the circumstances in
which the contract was entered into or demonstrate that the contract was
subject to a particular trade usage or custom.
c) Robertson Vs French
[1803] 4 East 130
Where there is conflict
between the printed and written clauses of a policy, greater consideration will
be paid to the written clauses.
Lord Ellen borough CJ
at pg 136 said’
“The only difference between policies of insurance, and other
instruments in this respect, is, that the greater part of the printed
instruments of them, being invariable and uniform, has acquired from use and
practice a known and definite meaning, and that the words superadded in writing
[subject indeed always to be governed in point of construction by the language
and terms with which they are accompanied) are entitled nevertheless, if there
should be any reasonable doubt upon the sense and meaning of the whole, to have
a greater effect attributed to them than
to the printed words, in as much as the written words are the immediate
language and terms selected by the parties themselves for the expression of
their meaning, and the printed words are a general formula adapted equally to
their case and that of all other contracting parties upon similar occasions and
subjects.”
29th
November 2004
PRINCIPLES OF INSURANCE
1.
Insurable interest – in the words of John
Birds,
“Insurance interest is
a basic requirement of any contract of insurance unless it can be and is
lawfully waived. At a general level this means that the party to the insurance
contract who is the insured or policy holder must have a particular
relationship with the subject matter with the insurance whether that be, “a
life or property or a liability to which he might be exposed”
Every of insurance contract
requires an insurable interest to support it, otherwise it is invalid. This was
held in;
Anctil
Vs Manufacture Life Insurance Co.
[1899] AC 604.
Insurable interest is
essentially the pecuniary or proprietary interest which is at stake or in
danger should the insured opt not to take out an insurance policy on the
subject matter. It is the interest which the insured stands to loose if the
risk attaches. The classical definition of insurance interest was given by
Lawrence J in
Lucena Vs Craufourd
[1806] 2
Bos & PNR 269 at 302.
“ 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 imported 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 subject of privation, but the having 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 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 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 have
benefit from its existence, prejudice from its destruction. The property of a
thing and the interest is devisable from it may be very different of the first,
the price generally the measure but interest in having every benefit or
advantage arising out of or depending on such thing may be considered as being
comprehended”
This definition was partially
adopted by the Marine Insurance Act 1906. A person is deemed to have an insurance
interest in the subject matter if he is likely to suffer prejudice in the event
of its loss, damage or destruction. Courts of law have abstracted the following
rules as the determinants of insurance interest.
a) A direct relationship
between the insured and the subject matter.
b) The relationship must
have arisen out of a legal or equitable right or interest in the subject
matter.
c) The interest bears any
loss or liability arising in the event of loss it risk attaches.
d) The insured’s right or interest in the subject
matter must be capable of pecuniary estimation or quantification.
As a general rule,
insurable interest must have a pecuniary value.
Halford Vs Kymer
[1830] 10 B & C 724.
However it need not be permanent
or continuous. A right to a future interest or possession is insurable. The
insured’s interest must be kept must be real. It therefore follows that a mere
expectation of acquiring an interest is not insurable.
Stockdale Vs Dunlop
[1840] 6 M & W 224 OR 151 ER 391
Medieval Common Law did
not insist on the presence of insurable interest on the part of the insured.
Its requirement as a component of insurance contracts is for the most part
statutory e.g. Under Section 4 [1] of the Marine Insurance Act, 1746, insurance
interest was made a perquisite of marine insurance. The requirement was
extended to life insurance by the Life Assurance Act 1774 whose Section
provides that ‘
“No insurance shall be
made by any person or persons on the life or lives 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. [Similar to Section 94[1] Insurance Act.]
The requirement of
insurance interest was extended to all categories of insurance by the Gaming Act
1845. Section 5[1] of the Marine Insurance Act and Section 94 [1] of the
Insurance Act make insurance interest mandatory in contracts of insurance.
Who has Insurance Interest?
Section 6-20 Marine
Insurance Act.
Section 94 [2] of the
Insuarcne Act.
1. Insurance co Ltd Vs Stimson. [1888] 103 US 25, 471. Where a contractor insured the Hotel
after the completion but before handing over to the owner and building was
subsequently destroyed by fire before the policy lapsed. It was held that the
contractor was entitled to indemnity as he had an insurable interest in the
building by virtue of the mechanics lien.
2. In Stockdale Vs Dunlop. The
plaintiff had insured the value and the profit of palm oil, he had verbally
agreed to buy from a company while two ships were on the high seas and one went
missing. His action fro indemnity failed as he had not insurable interest in
the oil.
3. In Macaura Vs Northern
Assurance Co [1925]AC 619. The plaintiff had insured the company’s timber in his own
name and t was held that he was not entitled to an indemnity as he had no
insurable interest in the timber. Appellant
who owned a timber estate assigned the whole of the timber to a company
known as Irish Canadian Sawmills Company Limited for a consideration of
£42,000. Payment was effected by the
allotment to the Appellant of 42,000 shares fully paid up in £1 shares in the
company. No other shares were ever issued.
The company proceeded with the cutting of the timber. In the course of these operations, the
Appellant lent the company some £19,000.
Apart from this the company’s debts were minimal.
The Appellant then insured the timber against fire by
policies effected in his own name. Then
the timber was destroyed by fire. The
insurance company refused to pay any indemnity to the appellant on the ground
that he had no insurable interest in the timber at the time of effecting the
policy. The courts held that it was clear that the Appellant had no insurable
interest in the timber and though he owned almost all the shares in the company
and the company owed him a good deal of money, nevertheless, neither as
creditor or shareholder could he insure the company’s assets. So he lost the Company.
4. Thomas Vs Continental Creditors [1976] AC 346 it was held inter alia that a creditor has an
insurance interest in the life of the debtor to the extend if the debt.
5. In Hebdon Vs West [1863] 3 B& S 579. It
was held that an employee has an insurance interest in his employees to the
extent of the services rendered and an employee ahs an insurance interest in
the life of an employer to the extent of their relationship.
6. In Grifith Vs Fleming [1909] 1 KB 805.
[1908-10] ALL ER 760, it was held that a husband has an insurabnle interest imn
the life of his wife and vice versa.
7. In Sat Dev Sjarma Vs The home Insurance Co of
New York [1966] EA 8 It was wrongly eld that the plaintiff a proprietor of
a private school has no insurable interest in the life of the assured who were
one of the 3 instructors.
8. Harse vs Pearl Life Assurance Co.
[1094] 1 KLR 558. An agent honestly believed that the insured had an insurable interest
persuaded him to take a policy in circumstances in which he had no interest but
subsequently ascertained the truth and sought to recover the premium. It was
held that they were irrecoverable as he had no interest and the parties were in
Pari Delicto .” equally to blame..
However in case of active
frauds, premiums a[paid are recoverable as were the case in Hughes Vs Liverpool
Victoria Legal Friendly Society [1916] 2 KB 482 where the defendant’ agent
fraudulently induced the plaintiff to take out an insurance policy in
circumstances in which he had no insurance interest.
The English Court of
Appeal held the premiums recoverable as the parties were not in pari delicto.
In the words of Bankes L.J. at 496 he stated;
“The authority seem to
mean to be all one way, namely that an innocent plaintiff is entitled to say
that he is not in pari delicto with
the defendant’s whose agent by force and fraudulent misrepresentations induced
him to belief that the transaction was an innocent one..
Other case includes.
· Newbury International
Ltd Vs Reliance National [UK] 1994] 1 Lloyds Rep. 83
· Fuji Finance
Incorporation Vs Actir Insurance Co.[ 1997] 1 Ch 173
· Glengate Vs Norwich
union insurance Society [1996] Lloyds Rep. 278
· Colonial Mutual General
Insurance Vs ANZ [1995] 1 WLR 1140
Section 7-15 of the Marine Insurance Act and Section 94 of
the Insurance Act
identifies circumstances in which persons are deemed to have an insurable interest
in the subject matter.
Description of Insurable Interest.
It is generally no
necessary for the insured to specify the nature and extent of the interest on
the subject matter.
Section
26[2] Marine insurance Act provides that the nature and extent of the interest
of the assured in the subject matter need not be specified in the policy. This
position is justified on the premise that the property insurance, the insurer’s
principal concern is the amount payable under the policy. However a description
of the nature and extent of the interest is necessary where:
1. The proposal form
requires or contains an express stipulation or condition to that effect.
2. The subject matter of insurance
includes prospective profit or consequential loss e.g. insurance of goods in
transit.
3. Precarious losses are
involved. These are circumstances in which loss is likely to be greater than
expected hence more information is necessary to enable the insurer appreciate
the full extent of the risk.
When must insurable interest exist?
It depends on the contract.
The insured must at one stage or another exhibit an insurable interest in the
subject matter. In indemnity contracts e.g. fire, marine etc Insurable interest
must exist when risk attaches.
1.
Section 6[1] Marin Insurance Act provides the assured must
be interest in the subject matter at the time of the loss. Though he need not
be interested when the insurance is effected [Stockdale Vs Dunlop]
2.
In life insurance the proposer must furnish an insurance
interest when the policy is effected. Dalty
Vs India And London Assurance Co
3. With regard to statutory
policies, the insured must furnish the insurable interest at the time
stipulated by the statute e.g. in compulsory third party Motor Vehicle
Insurance, the insured must have an interest when risk attaches.
Role of Insurable Interest.
1. It establishes a nexus
[link] between the insured and the subject matter by demonstrating that the
insured stands to loose should the risk attach. This discourages the insured
from destroying the subject mater.
2. It confers upon the
insured a right to sue on the policy. Cosforol
Union and Others Vs Poor Law and Local Government Officers Mutual Guarantee
Association Ltd [1901] 103 LT
463.
3.
This principle has been used by insurers as a profit
maximization devise. Sat Dev Sharma Case,
Pearl Life Insurance Case.
