Insurance law is mainly derived from the general law of contract. Therefore the insurance contract will have certain elements that are legally binding. These include:
- Legal form
- Offer and acceptance
- Legal objects
- Competent parties
- Legal Form: – There is no requirement that insurance contracts be in writing but in many instances, the form and content is carefully governed by law. To be a legal form, the insurance contract must have same standard wording as the legal standard wording as the legal standard policy and must be properly filed by with the government.
- Offer and Acceptance:– To have a legally enforceable contract, there must be a definite and qualified offer made by one party to be accepted in the exact terms by the other party. In the case of insurance, the offer is made by the prospect when applying for insurance; acceptance occurs when an agent of the insurance company binds the coverage or when the policy is issued by the insurer.
- Consideration: – The binding cost to any contract is the consideration, i.e an item of value that each party gives to the other. For insurance contracts consideration will be in the form of promise by the insurer to compensation the insured in the event that a loss occurs.
- Legal Object: – A contract must be legal in its purpose or objectives. For example a contract to commit murder by one party for a specific amount of money will not be enforceable in a count of law. The same concept applies for insurance, and such contracts whose objectives are not legal will not be honored.
- Competent Parties: – The parties to the agreement must be capable of entering a contract as per the law. Minors, mentally incompetent persons, or bankrupt persons are not permitted by law to enter into an insurance contract because they are regarded as incapable of understanding the contractual terms.
Other contractual provisions
Insurance as a contract of adhesion
A contract of adhesion is one prepared by one party, the insurer to be accepted or rejected by another party. If the insured does not like the contract terms, he may choose not to purchase the insurance. Therefore, if he purchases the insurance, he must accept the policy the way it is. Under this doctrine, the counts of law have ruled that a person is bound by the terms of a written contract that he signs or accepts whether or not the person reads the contractual terms
Insurance as a aleatory contract
A aleatory means that the outcome is affected by chance and the money given by the contractual parties will be unequal. That is the insured pays the required premiums and if no loss is suffered, the insurer pays nothing. However, if a loss occurs, the compensation made to the insured will outweigh the insured’s premium.
Insurances as a contract of good faith (fiduciary contract)
Applicants for insurance must make full disclosures for the risk to the insurance agent or company. The risk that the insurer assumes must be equal to the risk that is being transferred to them by the insured.
Note: – When a member of a part has entered a contract and they disagree about the contract terms, or when one party questions the very existence of the contract, the other party may go to court to seek remedy. The count will decide on the issue in question and give it’s ruling based. Precedence is decisions of similar cases made earlier.
Insurance policy contractual
Even though insurance contracts may be different, they may have similar characteristics. They are composed of four basic parts:
- Declarations – statements made by insured considered 2B legal representation
- Exclusions – what insurer will not cover
- Insuring agreement – insurer promises 2 pay insured should a loss occur
- Conditions – rights and duties both parties
- Declarations – This section will contain statements made by the insured that are considered to be legal representations. Also to be the insured this section is the policyholder’s name, property insured, its value and other factors relating to.
- Exclusions – In this section, the insurance company state what it will do. The number of exclusions has a direct relationship with the broadness or narrowness of the insurance company. If the policy is written on a name variable basis for example five, theft etc, the exclusions will be few but if the policy is an open peril e.g general accident policy, it will have more exclusions to eliminate coverage of risks that are not insurable.
Reasons for exclusions in insurance contracts
Eliminate losses arising from catastrophic events.
Insurance companies do not provide for losses arising from catastrophic events such as tsunami. This is because they do not occur regularly thus can not attract an insurance pool to cater for claims when losses occur
To eliminate losses as a result of moral or morale hazard
E.g. car insurance policy denies liability to pay a claim if the insured was driving drunk
To eliminate coverage not needed by the typical insured.
This is because incase an insured wants a special coverage (i.e. coverage different from the standard policy) that covers for more losses, then the insurance company charges extra premium to remove the exclusion.
To eliminate coverage where another policy is designed to cover for the loss. E.g. the home ownership policy excludes cover for automobiles.
To exclude non insured parties from benefiting from coverage.
This is where a party other than the owner has custody of the property and insures on behalf of the owner e.g. bailer (party with custody of property which does not belong to him) will not be allowed to claim in the presence of bailer incase a loss occurs.
To control costs and keep premiums affordable
This is because like any other business, insurance businesses have competitors. To attract customers, insurance companies charge relatively low premium compared to they competitors, thus the more losses covered in a policy the higher the premium.
- Insuring agreement – Here, the insurer promises to pay for the loss should the loss occur due to the peril covered.
- Conditions – This section spreads out in details the rights and duties of both parties to the insurance agreement. For example, the duty of the insured in the event of a loss such as to report immediately to the insurer in cases of loss.
Insurance principles are the basic doctrines that guide the practice of insurance. They include:
An insurable contract is one whereby the insurer agrees to indemnify the insured should a particular event occur or pay him a specified amount on the happening of some event. In return the insured pays a premium. The subject matter of insurance under a fire policy can be buildings, under liability policy can be legal liability for injury or damage, under life assurance policy the life assured, in marine is the ship etc. It is important however to note that it is not the house, ship etc that is insured. It is the financial or pecuniary interest of the insured in the subject matter that is insured. The subject matter of the contract is the name given to the financial interest which a person has in the subject matter of the insurance. This is the root of insurable interest as in the case of Castellain V Preston (1883) “What is it that is insured in a fire policy? Not the bricks and materials, but the financial interest of the insured in the subject matter of insurance.”
A contract of Life Assurance was enforceable at common law despite the absence of any relationship between the assured and the life assured. Wagers in general were legally enforceable and courts had no option but to enforce them like life assurance contracts. This position led to an increase in murder cases and raised public concern. Responding to this public concern, the Life Assurance Act 1774 was enacted. But this only addressed the matter on the life assurance front but other forms were exposed except Marine where the Marine Insurance Act 1745 had addressed this. But successive legislation particularly the Gaming Act 1845 rendered all contracts by way of gaming or wagering void. The following legislations are important:-
- Marine policies are governed by the Marine Insurance Act 1906 which renders all Marine policies without insurable interest void.
- Life assurance policies are governed by the Life Assurance Act 1774- which renders all life assurance policies without insurable interest void.
- All other polices are governed by the Gaming Act 1845 – which also renders the policies without insurable interest void.
The following are the differences between an insurance contract and wagering contract
Essential Features of Insurable Interest
- There must be some property rights, interest, life, limbs or potential liability capable of being insured.
- Such property, rights, interest etc must be the subject matter of insurance.
- The insured must stand in a relationship with the subject matter of insurance whereby he benefits from its safety and would be prejudiced by its damage.
- The relationship must be recognized at law e.g. Macaura V. Northern Assurance Company (1925). Mr. Macaura effected a fire policy on an amount of cut timber on his estate. He later sold the timber to a one-man company of which he was the only shareholder. A great deal of the timber was destroyed in a fire and the insurers refused to pay the claim on the basis that Mr. Macaura had no insurable interest in the assets of the company of which he was principal shareholder. A company is a separate legal entity from its shareholders and the relationship between timber and Mr. Macaura, whereby Macaura stood to loose by its destruction – had to be one recognized or enforceable at law. In this case such a relationship did not exist as Macaura’s financial interest in the company as a shareholder was limited to value of his shares and he had no insurable interest in any of the assets of the company.
Creation of Insurable Interest
Insurable interest may arise in the following circumstances:
- At common law e.g. ownership of property or potential liability a negligent car driver may be faced with it.
- By contract – Here a person agrees to be liable for something for which he would not be liable in the absence of the contractual condition e.g. a landlord passing damage responsibility to a tenant. Such contracts place the tenant in a legally recognized relationship and hence insurable interest.
- By Statute – Some statutes place responsibilities on people similar to contractual obligations e.g. married women’s property Act (1882) and married women’s policies of assurance Act 1980. These Acts provided married women with insurable interest in their own lives and those of their husbands for their own benefit.
Statutes Modifying Insurable Interest
The liability of some people was too onerous and statues were passed modifying this liability. In most cases insurable interest was correspondingly reduced.
- Carriers Act 1830 – A common carrier is exempted from liability for certain valuable articles of greater value than a fixed amount, except where the value is declared and an extra charge paid
- Hotel proprietors Act 1956 – Where people have booked sleeping accommodation at a hotel, where a schedule of the Act is displayed prominently, the liability for loss or damage to property of a guest is limited to a fixed amount so long as he was not negligent.
- Trustee Act 1925 – Trustees can effect fire insurance on trust property, paying premiums from the trust income.
Application of Insurable Interest to Main Forms of Insurance
- Life Assurance
Everyone has un-limited insurable interest in their own life and is entitled to effect a policy for any sum assured. Also a person has unlimited insurable interest in the life of his or her spouse. However, a blood relationship does not imply an automatic insurable interest. But some people can assure the life of another to whom they bear a relationship recognized at law, to the extent of a possible financial loss. Therefore, partners can insure each others lives up to the limit of their financial involvement. Also a creditor has insurable interest in the life of his debtor.
- Property Insurance
For Property, insurable interest mostly arises out of ownership. A person with a partial interest in some property is entitled to insure the full value of that property rather than his partial interest. But in the event of loss, he acts as a trustee passing over other proceeds to the other partners. Mortgagees and mortgagors have insurable interest; the purchaser as owner and seller as creditor. A bailee is a person legally holding the goods of another either for payment or gratuitously and is legally responsible for property under their care and hence have insurable interest.
- Liability Insurance
A person has insurable interest to the extent of potential legal liability he may incur by way of damages and other costs. A person’s extent of interest in liability insurance is without limit.
When Insurable Interests Must Exist
- In Marine Insurance, insurable interest need only exist at the time of any loss. This is because of customs of maritime trading where cargo may change ownership while in transit and protects merchants who may assume interest in cargo during a voyage.
- In Life assurance – Insurable interest needs to exist when the policy is effected and not necessarily at the time of claim.
- For all other Insurances – Insurable interest must be present both at the time of affecting the policy and when any claim is made.
Utmost Good Faith
Most commercial contracts are subject to the doctrine of caveat emptor (let the buyer beware). In most of these contracts each party can examine the item or service and as long as one does not mislead the other party and answers questions truthfully, the other party cannot avoid the contract. There is no need to disclose information not asked for. However, when it comes to arranging insurance contracts, while the proposer can examine a specimen of the policy document before accepting the terms, the insurer is at a disadvantage as he cannot examine all aspects of the proposed risks which are material to him. In order to make the situation more equitable, the law imposes a duty of ‘uberrimae fidei’ or utmost good faith on the parties to an insurance contract. The contract is deemed to be one of the faith or trust. The duty of full disclosure rests on the underwriters also and they must not withhold information from the proposer which leads him into a less favorable contract e.g. not to accept an insurance which they know is un-enforceable at law or they are not registered to underwrite.
Utmost good Faith is a positive duty to voluntarily disclose, accurately and fully all facts, material to the risk being proposed, whether asked for or not.
A material fact is every circumstance which would influence the judgment of a prudent insurer in fixing the premium or determining whether he will take the risk. However, a fact which was immaterial when the contract was made, but later became material need not be disclosed in the absence of a policy condition requiring continuous disclosure. The facts that must be disclosed are:-
- Facts which show that the risk being proposed is greater because of individual, internal factors than should be expected from its nature or class.
- External factors that make the risk greater than that normally expected.
- Facts that would make amount of loss greater than normally expected
- Previous losses and claims under other policies.
- Previous declinature or adverse terms imposed on previous proposals by other insurers.
- Facts restricting subrogation rights due to the insured relieving third parties off liabilities which they would otherwise have.
- Existence of other non-indemnity policies like life and personal accident.
- Full facts relating to and descriptions of the subject matter of insurance
The following facts need NOT to be disclosed:-
- Facts of law.
- Facts which the insurer is deemed to know.
- Facts which lessen the risk.
- Facts about which the insurer has been put on enquiry
- Facts which the insurer’s survey should have noted.
- Fact s covered by policy conditions.
- Facts which the proposer does not know.
- Facts (convictions) which are ‘spent’ under the rehabilitation of offenders Act 1974.
Duration of the Duty of disclosure
At common law, it starts at commencement of negotiations and terminated when the contract is formed. However, inmost cases the conditions of a policy extend the common law position by requiring full disclosure during the currency of the contract which the insurer is not obligated to underwrite.
The position at renewal is that for life and permanent health insurance contracts disclosure lasts only until completion of the contract. This is because they are long term contracts. But in the other classes of insurance the original duty of disclosure is revived at renewal. However, for all classes if the terms of the contract are altered e.g. increase of sum insured, then the duty of disclosure arises.
Representations and Warranties
Representations are written or oral statements made during negotiations for a contract. Some of the statements will be material and others not. Warranties on the other hand in ordinary commercial contracts are promises, subsidiary to the main contract, a breach of which would have the aggrieved party with the right to sue for damages only. However, warranties in insurance contracts are fundamental conditions to the contract and a breach allows the aggrieved party to repudiate the contract. Warranties are imposed to ensure “good housekeeping” and also ensure certain features of higher risk are not introduced without the insurer’s knowledge. Warranties can either be express or implied. Express warranties are agreed on upfront e.g. I will not store inflammable liquids in my premises. Implied warranties are assumed to be part of the contract even though not expressly negotiated e.g. the vehicle is road worthy.
Breach of utmost good faith can either be innocent or accidental and deliberate or fraudulent. There are several remedies for breach of utmost good faith and include:-
- Avoid the contract by either repudiating the contract abinitio or avoiding liability for an individual clam.
- The damages if it is by concealment or fraudulent
- Waive these rights and allow the contract to carry on.
The aggrieved party must exercise the option within a reasonable time of discovery of the breach. However, for some insurance that are compulsory like third party cover for motor vehicles, the Road Traffic Act prohibits the insurer from avoiding liability on grounds of breach of utmost good faith. But the insurer may claim the amount paid from the insured though this situation is faced with practical differences.
In insurance contracts, there are two main types of perils that need consideration:-
- Insured Peril – these are perils that covered by the policy.
- Excluded Perils – these are the perils not covered by the policy.
It is because of the above that the principle of proximate cause is important. Every loss is the effect of some cause. Sometimes there is a single cause of loss but frequently there is a chain of causation or several causes may operate concurrently, and in these circumstances it may require considerable thought to decide whether the loss is within the scope of the policy or not. The doctrine covering such deliberations is proximate cause.
Proximate cause means the active, 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. It is not necessarily the first cause nor the last one but the dominant, efficient or operative cause.
Rules for the Application of Proximate Cause
- The risk insured against must actually take place e.g. mere fear of insured peril is not loss by that peril.
- Further damage to the subject matter due to attempts to minimize a loss already taking place is covered.
- Intervention of a new act is without the doctrine e.g. if during a fire onlookers cause damage to surrounding property then fire is not the cause of the loss.
- Last Straw Cases – where the original peril has meant that loss was more or less inevitable, the original peril will be the proximate cause even though the last straw comes from another source.
The following case law illustrates this:-
- Gaskarth V Law Union (1972) – a fire left a wall standing but in a weakened condition. Several days later, a gale caused the collapse of the wall onto another property. It was held that fire was not the proximate cause but the gale. The crucial factor was the delay of several days during which no steps were taken to shore up the weakened wall. The chain had been broken.
- Roth V South Easthope Farmers Mutual (1918) – Lightening damaged a building and almost immediately afterwards a storm blew it down. It was held that lightening was the proximate cause. There was no time to take remedial action and the danger created by the fire was still operating.
- Leyland Shipping V Norwich Union (1916) – Last Straw Cases- A marine policy excluded war risks. In time of war a ship was badly damaged. It managed to get to a port and repair work was started but had to be stopped when a storm blew up. The harbor master ordered the ship out of port in case she sank and blocked the harbor. Outside the harbor she met bad weather which normally she would have survived, but in this case she sank. It as held the proximate cause of loss was war risks, the ship was in danger of sinking from the moment it was damaged and as repairs had not been completed that danger was always present.
Is the controlling principle in insurance law. It responds to the question “what is the person to receive when the insured against event occurs? Indemnity is a mechanism by which insurers provide financial compensation in an attempt to place the insured in a pecuniary position he was in before the loss.
Indemnity is related to insurable interest as it is the insured’s interest in the subject matter of insurance that is in fact insured. In the event of a claim, the payment made to an insured cannot therefore exceed the extent of his interest. In life assurance and personal accident insurance, there is unlimited interest and thus indemnity is not possible.
Methods of Providing Indemnity
- Cash payment – It is the most common method of settlement where a cash payment representing indemnity to the insured is made. In liability insurance the money is paid directly to the third party rather than the insured.
- Repairs – It is commonly used in motor insurance where garages are authorized to carry out repair work on damaged vehicles.
- Replacement – It is common in glass insurance where windows are replaced on behalf of insurers by glazing firms. It is also used in motor vehicle insurance where a nearly new car is destroyed and replaced by a similar model.
- Reinstatement – Used in property insurance where an insurer undertakes to restore or rebuild a building damaged by fire.
Measurement of Indemnity
In property insurance the measure of indemnity in respect of loss of any property is determined not by its cost but its value at the date of the loss and at the place of the loss. If the value of the property has increased, the insured is entitled to this subject to the sum insured or average being applied. For buildings it is the cost of repair or reconstruction less an allowance for betterment which includes improvements or non deductions of wear and tear. In liability insurance the measure of indemnity is the amount of any court award or negotiated out of court settlement plus costs and expenses thereon.
Factors Limiting the Payment of Indemnity
- Sum Insured – The limit of an insurer’s liability is the sum insured. The insured cannot receive more that the sum insured even where indemnity is a higher figure.
- Average clause – Where there is under-insurance the insurers are receiving a premium only for a proportion of the entire value at risk and any settlement will take this into account using the formula.
Liability of Insurer = Sum Insured x loss
When average operates to reduce the amount payable, the insured receives less than indemnity.
- Excess – An excess is an amount of each and every claim which is not covered by the policy. Where excess applies to reduce the amount paid, the insured receives less than indemnity
- Franchise – A franchise is a fixed amount which is to be paid by the insured in the event of a claim. But once the amount of franchise is exceeded then insurers pay the whole of the loss.
- Limits – Many policies limit the amount to be paid for certain events.
- Deductibles – Deductible is the name given to a very large excess particularly in commercial insurance.
Extension in the Operations of Indemnity
There are cases where the insured may receive more than indemnity.
- Reinstatement – An insured can request that his policy be subject to the reinstatement memorandum where settlement is without deductions of wear, tear and depreciation. The sum insured is normally high with consequent high premium.
- New for Old – Insurer agrees to pay for reinstatement of contents if destroyed within a specified period without deduction of wear and tear.
- Agreed additional costs – Insurers may pay including additional costs like architects and surveyors fees if agreed. This may mean receipt of more than
Subrogation and contribution are corollaries of indemnity. A major effect of indemnity is that a man cannot recover more than his loss, he cannot profit from the happening of an insured event. Subrogation is the right of one person to stand in the place of another and avail himself all the rights and remedies of that other, whether already enforced or not. In the case of Burnand V Rodocanachi (1882) – It was held that the insurer having indemnified a person was entitled to receive back from the insured anything he may receive from any other source. Subrogation only applies where the contract is one of indemnity. Therefore life and personal accident contracts are not subject to subrogation. However, also an insurer is not entitled to recover more than he has paid out.
Extent of Subrogation Rights
- An insurer is not entitled to recover more than be has paid out. Insurers must not make profit by exercising subrogation rights.
- Where the insured retains part of the risks e.g. by an excess or application of average, he is entitled to an amount equal to that share of the risk out of any money recovered. Where the insurer makes ex-gratia payment to an insured then the insurer is not entitled to subrogation rights. This is because ex-gratia payment is not indemnity and subrogation rights arise only to support the concept of indemnity.
Ways in which Subrogation May Arise
- Arising out of tort – A tort is a civil wrong and incorporates negligence, nuisance, trespass, defamations and other legal wrongs. Where an insured has sustained some damage, lost rights or incurred liability due to the tortuous actions of some other person, then his insurer, having indemnified him for loss, is entitled to take action to recover the outlay from the tortfeasor or the wrong doer.
- Right arising out of contract – This can arise where a person has contractual rights to compensation regardless of fault and where the custom of trade to which the contract applies dictates that certain bailees are responsible e.g. hotel proprietor. The insurer then assumes the benefits of these rights e.g. tenants agree to make good any damage to the property they occupy. The owner may also maintain an insurance policy and in the event of damage; if he recovers from the insurance policy, he is not entitled to compensation from the tenant and the insurers assume the rights to any money from the tenants.
- Right arising out of statute – where a person sustain damage in a riot and is indemnified, his insurers have a right to recover the outlay from the police authority as per Rot Damage Act 1886.
- Rights arising out of subject Matter of insurance – where an insured has been indemnified for a total loss, he cannot claim the salvage as it would be more than indemnity.
At common law subrogation does not arise until the insurers have admitted the insured claim and paid it. However, insurers place a condition in the policy giving themselves subrogation rights before the claim is paid. Subrogation has the effect of ensuring negligent persons are not ‘let off the hook’ simply because there was insurance.
Modification to the Operation of Subrogation
The exercising of subrogation rights by one insurer my involve claiming money from another insurer. For a motorist hitting property, the property insurer would exercise subrogation against the driver who in turn passes it to motor insurer. This may mean insurers getting involved against each other often. This is particularly true for motor insurance and is handled in the following ways:-
- Motor insurance – Some insurers waive their subrogation rights against each other by executing “knock for knock” agreements.
- Other insurers sign agreements whereby they contribute towards the losses by pre-determined proportions.
- In employers’ liability, subrogation is waived where one employee causes injury to another.
In a case where someone has a right to recover his loss from two or more insurers with whom he has affected policies, the principle of indemnity prevents the insured from being more than fully indemnified by each by way of contribution. Contribution ensures that the insurers will share the loss as they have all received a premium for the risk. Contribution applies only to contracts of indemnity. Contribution is the right of an insurer to call upon others similarly but not necessarily equally liable to the sum insured to share the cost of an indemnity payment.
At common law contribution will only apply where the following are met:-
- Two or more policies of indemnity exist.
- The policies cover the same or common interest
- The policies cover the same or common peril giving rise to loss.
- The policies cover the same or common subject matter
- Each policy is liable for loss.
The policies do not require to cover identical interest, perils or subject matter so long as there is an overlap shared by them.
The leading case in contribution is North British & Mercantile V Liverpool & London Globe (1877). It is also known as the “King and Queen Granaries” case. Merchants had deposited grain in the granary owned by Barnett. The latter had a strict liability for the grain by custom of his trade and had insured it. The owner had insured it to cover his interest as owner. When the grain was damaged by fire the bailee’s insurers paid and sought to recover from the owner’s insurers. As interests were different, one as bailee and the other as owner, the court held that contributions should not apply.
When Contributions Operates
- At common law – When an insured has more than one insurer, he can confine his claim to one of them if he so wishes and that insurer must meet the loss to the limit of his liability and can only call for contribution from the others after he has paid.
- To avoid the common law position, there is a contractual condition – where most policies state that the insured is liable only for his “rateable portion” of the loss and the insured is left to make a claim against the other insurers if he wishes to be indemnified.
However, sometimes the equitable right to contributions is removed by non-contributory clauses e.g. “this policy shall not apply in respect of any claim where the insured is entitled to indemnity under any other insurance. Where a policy is issued covering a wider range of property, a “more specific clause” is usually inserted to prevent contribution between the wide range policy and any which might be more specific in its cover. Also there are market agreements in relation to injuries suffered by employees being carried in the employer’s vehicle in the course of their employment. A claim could arise under the motor policy and employers’ liability policy. The market agreement states that such claims will be dealt with as employers’ liability claims and that there is no contribution with the motor insurers.