Question
Identify and briefly explain five principles of insurance.
Answer
Principles of insurance
Insurable Interest
This is the financial or monetary interest at stake or in danger if the subject matter is not insured. It is the interest a person has in the subject matter which he stands to lose in the event of its loss or destruction. 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 contract of insurance contract requires an insurable interest to support it, otherwise it is invalid.
Disclosure/utmost good faith
The duty to disclose exists throughout the negotiation period. It generally comes to an end when the proposal form is accepted. It was so held in Lishman V Northern Marine Insurance Co. The non-disclosure of a material fact by either partly renders the contract voidable at the option of the innocent party. In London Assurance Company V Mansel (1819) it was held that the contract was voidable at the option of the insurer for the concealment of material fact
Indemnity
This principle means that when loss occurs, it is the duty of the insurer to restore the insured to the position he was before the loss. The insurer must so far as money can do; put the insured to the position he was before the loss.
Indemnity means that there should be no more or no less than restitutio in integrum.
In the words of Brett L.J in Caste/lain v. Preston,
“The insured is to be fully indemnified but is never to be more than fully indemnified”.
The principle of indemnity ensures that it is the duty of the insurer to ascertain whether there are circumstances which reduce, diminish or extinguish the loss as they have a similar effect on the amount payable by the insurer for the loss.
Subrogation
This means that after the insurer has indemnified the insured, he steps into the shoes of the insured in relation to the subject matter. It means that after indemnity the insurer becomes entitled to all the legal and equitable rights respect the subject matter previously exercisable by the insured. Subrogation facilitates indemnity by ensuring that the insured does not benefit from the contract. It is an inherent and latent characteristic of the contract of indemnity that becomes operative after full indemnity. The insurer cannot under subrogate rights recover more than the amount payable as indemnity as was the case in Yorkshire Insurance company Ltd. v. Nisbett Shipping Co.
Salvage
This is the recovery by the insurer of the remains of the subject matter after indemnity. It is part of subrogation and facilities indemnity. It is justified on the premise that the amount paid by the insurer as indemnity includes the value of the remains.
Re-instatement
This is the repair or replacement of the subject matter in circumstances in which it may be re-instated. Most indemnity policies confer upon the insurer an option to pay full indemnity or re-instate the subject matter. The insurer must exercise his option within a reasonable time of notification of loss and is bound by his option. If the insurer opts to re-instate, the subject matter must be re-instated to the satisfaction of the insured. Any loss or liability arising in the course of re-instatement is borne by the insurer. The economic effect of re-instatement is to benefit the insurer by ensuring that he only pays full indemnity where the re-instatement is not possible.
Double insurance
This is a situation whereby a party takes out more than one policy on the same subject matter and risk with different insurers but where the total sum insured exceeds the value of the subject matter.
Contribution and apportionment
If an insured has taken out more than one policy on the same subject matter and risk with different insurers and loss occurs, the twin principles of contribution and appointment apply:-
- If the insured claims from all the companies at the same time, they apportion the loss between themselves on the basis of the sums insured. Each insurer bears part of the loss. This is the “Principle of Apportionment”
- If one of the insurers makes good the total liability to the insured, such insurer is entitled to recover the excess payment from the other insurers. This is the “Principle of Contribution”. This principle is to the effect that an insurer who has paid more than his lawful share of the loss is entitled to receive the excess from the other insurer.
Abandonment
This is the surrender by the insured of the remains of the subject matter for full indemnity. It entails the giving up the res (residue) to the insurer for indemnity. This principle has its widest application in Marine Insurance but generally applies in case of:-
The principle of contribution is equitable. An insurer is only entitled to contribution if the following conditions exist.
- There must have been more than one policy on the same subject matter and risk.
- The policies must have been taken out by or on behalf of the same person
- The policies must have been issued by different insurers
- The policies must have all been in force when loss occurs
- All the policies must have been legally binding agreements
- None of the policies must have exempted itself from contribution.
The twin principles of contribution and apportionment facilitate indemnity.
- Partial loss
- Constructive total loss.
The insured must notify the insurer of his intention to abandon the subject matter. However, it is for the insurer to determine whether or not abandonment is applicable. If the insurer opts to pay full indemnity, it signifies the sufficiency of the insured’s notice and it is an admission of liability. The insurer becomes entitled to the remains of the subject matter.
Proximate cause
An insurer is only liable where loss is proximately caused by an insured risk and not liable where the risk is expected.
The principle of proximate cause protects the insurer from undue liability. Under this principle, the proximate and not the remote cause is to be looked into. (Causa proxima non remota spectatur}
The proximate cause of an event is the cause to which the event is attributable. It is the cause which is more dominant direct, operative and efficient in giving rise to the event.
Courts have not developed any technical test of ascertaining what the proximate cause of an event is.
They rely on common place tests of the reasonable man and that among competing causes, one must be more dominant that the rest.
The proximate cause need not be the last on the chain but must be the must operative in occasioning the loss.
Average clause.
This is a clause in an insurance policy to the effect that if the subject matter is under insured and partial less occurs, the insurer is only liable for a proportion of the loss and where loss is minimal the insurer liability is extinguished. This clause ensures that subject matter is insured at its correct value.
