insurance law

5/22/2018 Insurance Law

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DEFINITIONAL PROBLEM

What is insurance? Insurance is a contract

There must be a contractual relationship between insurer and insured.

Premiumthis is the consideration that passes from the insured to the insurer.

Uncertainty there must be uncertainty Prudential Assurance & Inland Revenue

Commissioner. It is not possible ordinarily to insure a certainty.

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

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

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

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

Peril: - cause of loss

Hazardcondition that increase or reduce chance of loss arising.

Risk is what insurance addresses.

1. financial risk;

2. Dynamic Risk and Static Riskdynamic risks in the short term are losses but in the long termthey are benefits.

3. fundamental risks/

4. Pure risk/Speculative

It has been observed that the contract of insurance is basically governed by the rules which form

part of the general law of contract. But equally there is no doubt that over the years it has

attracted many principles of its own to such extent that it is perfectly proper speak of a law of

insurance.

In the words of Collinvaux in his book Law of Insurance at page 2 he says insurance

contracts also exhibit certain features which as a matter of common law apply only to them.

Historically statutes dealing with the regulation of insurance business have not attempted to


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define the contract of insurance to obviate the danger of excluding contracts that should be

within their scope. However a definition is essential on account that insurance business is

closely regulated.

In the words of Ivamy General Principles of Insurance Law at page 3 a contract of insurance

in the widest sense of the term may be defined as a contract whereby one person called the

insurer undertakes in return for the agreed consideration called the premium to pay to another

person called the assured a sum of money or its equivalent on the happening of a specified

event.

According to John Birds in Modern Insurance Law Page 13 it is suggested that a contract of

insurance is any contract whereby one party assumes the risk of an uncertain event which is not

within his control happening at a future time in which event the other party has an interest and

under which contract the first party is bound to pay money or provide its equivalent if the

uncertain event occurs.

In the words of Channel J. In a case of Prudential Assurance Company Ltd v. Inland Revenue

Commissioner [1904] 2.K.B. 658

Page 663 a contract of insurance then must be a contract for the payment of a sum of money or

some corresponding benefit such as the rebuilding of a house, or the repairing of a ship, to

become due on the happening of an event which event must have some amount of uncertainty

about it and must be of a character more or less adverse to the interest of the person effecting the

insurance. itmust be a contract whereby for some consideration usually but not necessarily

for periodical payment called premiums you secure to yourself some benefit usually but not

necessarily the payment of a sum of money upon the happening of some event.

IN the words of Lord Clark in the case of Scottish Amicable Heritage Securities Association

Ltd V. Northern Assurance Co. [1883] 11R 287

1. CONTROL


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It is a contract belonging to a very ordinary class by which the insurer undertakes in

consideration of the payment of an estimated equivalent before hand to make up to the assured

any loss he may sustain by the occurrence of an uncertain contingency

For a contract of insurance to exist there must be a binding agreement under which the insurer is

legally bound to compensate the other party or pay the sum assured. The parties to an insurance

contract are the insurer and the insured.

2. Premium

This is the consideration that passes between the parties to support the transaction. It is we

asserted that premium is the consideration which the insurers receive from the insured in

exchange for their undertaking to pay the sum insured if the event insured against occurs. Any

consideration sufficient to support a simple contract may constitute the premium in a contract of

insurance.

3. uncertainty

The insurance contract is aleatory or speculative it is also contingent as it deals with uncertain

future events. It must be characterised by some uncertainty. In the words of Channel J. in

Prudential Assurance Co. V Revenue Commissioner page 663 the judge says then the next thing

that is necessary is that the event should be one which involves some amount of uncertainty.

There must be either some uncertainty whether the event will ever happen or not. Or if the event

is one which must happen at some time or another there must be uncertainty as to the time at

which it will happen.

4. Insurable Interest:

The insurable event must be of an adverse nature. The insured must have an insurable interest in

the subject matter of insurance. This is the financial or pecuniary interest which is at stake or in


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danger if the subject matter is not insured. Insurable interests is a basic requirement of the

contract of insurance.

5. Control

The event insured against must be beyond the control of the party assuming the risk. Refer to Re

Sentinel Securities PLC [1996]1 W.L.R. 316

6. Accidental or Negligent Loss

Insurance can only be effected in circumstances in which loss is accidental in nature or is a

consequence of a negligent act or omission. Loss occasioned by intentional acts does not qualify

for indemnity or payment of the sum assured.

7. Risk

Ordinarily risk is understood to mean that in a given situation there is uncertainty about the

outcome and that a possibility exists that the outcome will be unfavourable. There is no

universally accepted definition of the term risk. It has been defined as the chance of loss, theprobability of loss, the probability of any outcome different from the one expected. It is a

condition in which a possibility of loss exists.

Generally risk is a condition in which there is a possibility of an adverse deviation from a desired

outcome. For personal purposes, risk is measured by the probability of loss in that the person

hopes that loss will not occur. But the probability of loss exists and this is used to measure the

risk.

The larger the number of exposure units the more predictable the probability of loss. The

standard deviation is used to measure the risk. The higher the probability of loss, the greater the

risk. As the greater the probability of loss the greater the probability of a deviation from what is

expected or hoped for.


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Risk differs from peril and hazard in that whereas peril is a cause of loss, hazard is a condition

which may create or increase the chance of loss from a given peril.

Types of or Classification of Risk

1. Financial and non-financial: - a risk is financial if the adversity involves a financial loss that is

monetary. It is non-financial if the loss is not of a pecuniary nature.

2. Dynamic and Static: dynamic risks are those resulting from changes in the economy for

example price levels, income consumer tastes, technological changes etc. These changes may

occasion loss to individuals or to persons. However in the long term they benefit society as they

are a consequence of adjustment to misallocation of resources. These risks are less predictable

and affect large segments of the society. Static risks involve losses which could have occurred

whether or not there were changes in the economy. They arise from causes other than the

economy e.g. perils of nature or natural perils, dishonesty etc. the society does not benefit from

these risks in any way. However they are generally predictable.

3. Fundamental and Particular Risks: Fundamental risks involve losses that are impersonal in

origin and consequence. They are group risks occasioned by economic social and politicalphenomena and affects large segments of the population. The society is generally responsible

i.e. no single individual can cushion society against them. Particular risks involve losses that

arise from individual events and are felt by the individual for example theft, destruction of

property etc.

4. Pure and Speculative Risks: Pure risks refer to circumstances which involve the chance of loss

and no possibility of gain while speculative risks describes circumstances in which there is a

possibility of loss and gain. In speculative risks there is a deliberate assumption of risk. They are

not insurable.

TYPES OF PURE RISKS


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(a) Personal Risk: This is the possibility of loss to the individual as a consequence of a peril or

event insured against for example premature death, old age, disability etc.

(b) Property Risk: This is risk borne by persons who have proprietary interest as the same may be

lost or destroyed. This risk encompasses direct and consequential or indirect loss.

(c) Liability Risk: The basic peril is the unintentional injury to a person or damage to their property

through negligence or carelessness. It involves the possibility of loss of present or future income

by reason of unintentional or careless acts or omission of others;

(d) Risks arising from failure of others: This is the possibility of loss by reason or failure of other

parties to fulfil their obligations for example within the required time.

METHODS OF HANDLING RISK

Risk Avoidance

This is the refusal by a person to accept risk. It is accomplished by disengaging in activities or

ventures that give rise to risk. It is a negative method of handling risk

Risk Retention

This is the most common method of risk management where a person with or without knowledge

of the risk takes no positive step to address the same. Voluntary retention .This is characterised

by the recognition that risk exists and a tacit agreement to assume any loss arising. Involuntary

retention takes place if the individual exposed to the risk is unaware of its existence.

Transfer of Risk

Risk may be transferred from one person to another or others willing to bear the same. It may be

shifted or transferred by contracts under which the other person assumes the others probability

of loss. For example insurance is a means of transferring risk as the insured provides


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consideration and the insurer undertakes to pay the sum assured or indemnify the insured when

risk attaches. Risk transfer may also be effected by hedging which involves a simultaneous

purchase and sale of goods for future delivery.

Risk Sharing

Risk may be shared in various ways for example

(i) Formation of a company where persons pool their resources with each member bearing only a

portion of the risk of failure of the corporation;

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

Risk Reduction

This is the adoption of loss prevention and control problems or measures whose purpose is to

reduce loss. For example alarms, burglar proofs, watchmen etc.

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

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

Wilson v. Jones

PARTIES TO THE INSURANCE CONTRACT

Risk continued

Wager

Like insurance, wagering contracts deal with uncertain future events. They are speculative in

character. In a wager parties agree that some consideration is to pass depending on the outcome

of some uncertain future event. Wagering contracts are an unenforceable. However the

fundamental distinction between insurance and wagering contracts is risk. Whereas in an


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insurance contract risk exists a priori in a wagering contract there is a deliberate assumption of

risk. In the words of Ellenborough C.J. in the case of Robertson v Hamilton (1811) East 522 the

judge says although insurance and wagering contracts are both speculative contracts risk is of

the essence to the insurance contract and the assured or insured is made to effect the insurance

contract because of the risk of the loss and does not create the risk of loss by the contract itself.

In wagering contracts neither of the contracting parties has an interest other than the sum or stake

to be won or lost depending on the outcome. Payment is dependent upon the event as agreed by

the parties and is not paid by way of indemnity and neither party suffers loss capable of being

indemnified.

In insurance the insured has an interest in the subject matter in respect of which he may suffer

loss. The uncertain event upon which the contract depends is prima facie adverse to the

insureds interest and insurance is effected so as to meet the loss or detriment which may arise

upon the happening of the event.

In the words of Blackburn J. in Wilson and Jones (1867) L.R. 2 Ex. 139 at 150 the Judge says I

apprehend that the distinction between a policy and a wager is this, a policy is properly speaking

a contract to indemnify the insured in respect of some interest which he has against the perilswhich he contemplates he will be liable to.

In a wager or gambling contract the question of indemnity does not arise. In wagers it is

essential that either party win or lose depending on the outcome of he uncertain event. In

insurance, the insured pays a premium to furnish consideration. It is independent of the event

insured against and the insured cannot be called upon to contribute anything more whether or not

the event occurs.

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

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

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

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


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

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

PARTIES TO AN INSURANCE CONTRACT

Insurance combines two types of contract.

The insured person who takes insurance. The insured must have an insurable interest in the

subject matter. Joel v. Law Union and Crown Insurance Co. the insured was of unsound mind.

Was the insurer bound to pay the sum assured. The law does not subject the proposal to any

other interest and even an insane person has insurable interest.

The insurance agent procures or solicits business for the company. At company law the

insurance agent is deemed to be the agent of the insured. If the agent completes the proposal

forms for one, then he is an agent of the insured. In Oconnor V. B.D.B Kirby & Others

Insurance combines first party and third party contracts most non-indemnity contracts (life

insurance) are first party while third party contracts are statutory. Where the insurer is bound to

compensate the insured or pay the sum assured. In either case parties to an insurance contractare invariably the insurer and the insured.

INSURED

This is the person who takes out an insurance policy. He is the person who shifts risk to the

insurer and maybe a natural or juristic person. An insured must have an insurable interest in the

subject matter. Under Section 5(1) of the Marine Insurance Act, every person has an insurable

interest who is interested in a marine adventure.

Section 94(1) of the insurance Act provides inter alia no policy of insurance shall be issued on

the life or lives of any person or persons or any other event or events whatsoever, wherein the


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person or persons for whose use, benefit or on whose account such policy or policies shall be

made, shall have no insurable interest.

Arguably the only delimiting factor in insurance is an adverse risk in the subject matter, the

question of unsoundness of mind in insurance was considered in Joel V Law Union and Crown

Insurance Co. [1908]2. K.B. 863

INSURER

This is the person who undertakes to indemnify the insured or pay the sum assured when risk

attaches. Insurers may be classified as the company brokers or underwriting associations and

agents. The history of insurance practice lays more emphasis on the company as the central

undertaking in insurance. The now repealed insurance companies act manifested this

phenomenon.

Section 22 of the Insurance Act provides that no person shall be registered as an insurer under

this Act unless that person is a body corporate incorporated under the Companies Act and at least

one third of the controlling interests whether in terms of shares paid up capital or voting rights as

the case may be are held by citizens of Kenya.

Under Section 23 (1) the Act specifies the minimum capital requirements for insurance

companies. No person shall be registered as an insurer or if registered shall have his registration

renewed unless he has a paid up capital of not less than 50 million shillings.

To carry on insurance business a company must be licensed by the Commissioner of Insurance.

Under Section 2(1) of he Insurance Act a broker is an intermediary concerned with the placing of

insurance business with an insured in expectation of payment by way of commission, brokerage,

fee allowance, etc.

Broking developed at the Lloyds Coffee House. Under Section 2(1) of the insurance Act an

agent is a person not being a salaried employee of the insurer but who in consideration of a

commission solicits or procures insurance business for an insurer or broker.


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An insurance agent commits both parties to the transaction. At common law an insurance agent

is deemed to be the agent of the proposer for purposes of completion of the proposal form. This

position is justified on the premise that the proposer controls all the information relating to the

subject matter. Any incorrect statements or any misrepresentation in the proposal form affects

the proposer adversely. However, if the insurance agent acts fraudulently he is deemed to be the

insurers agent.

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

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

so the premium was recoverable

Under the provisions of the Insurance Act 1891 Insurance Agents are deemed to be agents of the

insurer (English position at the moment) refer to O connor V B.D.B Kirby and Another [1917]

2 All E.R. 1415

Facts

The insured who owned a motor vehicle took out an insurance policy through the defendant

insurance broker. He supplied all the information and the broker completed the proposal form.In response to one question, the proposer stated that he had no garage and that the vehicle would

be parked by the side of the road. The Broker indicated that it would be kept in a garage. The

proposer or insured signed the proposal form and a policy was subsequently issued. The insured

later lodged a claim but the insurer repudiated liability when the mistake came to light. The

insured sued the broker in damages on the ground that the broker had broken his contractual duty

to complete the proposal form correctly.

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

1. It is the duty of the proposer for insurance to make sure that the information contained in the

proposal form is accurate and should not sign the form if it is inaccurate as it was the insureds

duty to check the entire contents of the form, the sole effective cause of loss was his failure to do

so.


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

In the words of Davis L.R. at page 1421 It was the duty of the insured to read this form, it was

his application, he signed it and if he was so careless as not to read it properly, then in my

opinion he has only himself to blame.

However under Section 81(2) of the Insurance Act where an agent or servant of an insurer writes

or fills in or has before the appointed date written or filled in any particulars in a proposal for a

policy of insurance with an insurer, a policy issued in pursuance of the proposal shall not be

avoided by reason only of an incorrect or untrue statement contained in the particulars so written

or filled in unless the incorrect or untrue statement was in fact made by the proposer to the agent

or servant for the purpose of the proposal and the burden of proving that the statement was so

made shall lie upon the insurer. To some extent this section modifies the common law position.

NATURE AND OPERATION OF THE INSURANCE MECHANISM

Insurance may be described as a social device whereby a large group of persons through a

system of equitable contributions may reduce or eliminate certain measurable risks of economic

cost resulting from the accidental occurrence of disastrous events. Its effect is to spread the costwhich normally would fall upon a single person in an equitable manner over the members of a

large group exposed to the same hazard.

The theory behind insurance is that members of an insurance scheme contribute to a central fund

from which payments are made in case one of their numbers suffers loss by occurrence of the

risk insured against. The payment of individual contributions is the premium. It has been

observed that insurance serves two basic roles namely:-

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

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


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These roles constitute the insurance mechanism. Insurance attempts to shift individual risk to a

group and does so equitably should the risk attach i.e. sharing of loss. By co-operating

individual loss is shared by members of the group.

Insurance may therefore be described as an economic device whereby the individual substitutes a

small certain cost for a large and certain financial loss in future which he would have to bear but

for the insurance. In practice the insurance mechanism anticipates the possibility of loss and

organises individuals into homogenous groups exposed to the same risk.

Insurance companies generally employ two mechanisms in grouping persons.

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

(ii) Posterior or empirical probabilities.

The law of large numbers is based on the likelihood of an event taking place and makes

predictions on the likelihood of such an event happening on the assumption that the happening

can be predicted with certainty. It operates on the theory that the observed frequency of any

event approaches the underlined probability as the number of trials approaches infinity.

Under posterior or empirical probabilities actuarial scientists determine the probability of risk

attaching by reference to the past and the prevailing circumstances.

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

present.

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

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

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

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


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5. The desire by enough persons of the group to share each others loss, the loss arising is definite

and predictable in financial or pecuniary terms, the loss must be tortious or accidental, the loss

must not be catastrophic in aggregate.

6. the cost of insurance must be economically feasible.

HISTORICAL DEVELOPMENT OF INSURANCE

The origins of the modern insurance in the practises adopted by the Italian Merchants from the

14th

century though the concept of insuring is an ancient one, maritime risk, risks of losing ships

and cargo led to the practice of medieval insurance which dominated insurance for many years.

The practice of insurance spread to London in the 16thCentury originally there were no separate

insurers a group of merchants would agree to bear all risk amongst themselves. Insurance

business in England developed alongside the Royal Exchange of London which was chartered in

1570.

Before its incorporation the exchange was a meeting place for merchants involved in different

commercial activities and many bargains were concluded at the venue. With time these

merchants realised that every transaction had a risk element and hence the need to cushionthemselves.

Marine insurance which is the oldest form of insurance was for many years transacted at the

Lloyds Coffee House. The earliest forms of insurance contracts were known as remission or

loans on Bottomry or Bills of Obligatory. A merchant would borrow money either by a public

prescription or privately for the purpose of buying goods on shipment and the loan was payable

at a fixed rate of interest if the ship and its cargo arrived safely. Nothing was payable in the

event of loss.

This system of insurance imposed a heavy burden on lenders and was unsatisfactory for

commercial purposes. In marine insurance the practice was that a merchant desiring insurance

would pass a slip of paper with the particulars of the ship and its cargo and people willing to


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accept a portion of the risk would initial the slip and when the total amount of insurance required

was underwritten the contract was complete.

For many years the common law played an insignificant role in the regulation of disputes

concerning insurance but this changed with the appointment of Lord Justice Mansfield as Chief

Justice in mid 18th

Century and by the latter half of the century the jurisdiction of courts over

insurance matters had been established. The principles developed in relation to marine insurance

have by and large been applied in other types of insurance.

Medieval Insurance was closely associated with Banking. Attempts were however made in the

13th

century to separate the two. Merchants in Venice and Genoa developed the so called risk

carrier or bill of surance or assurance which dealt with insurance transactions only. It operated

on the premise that a merchant would pay a specific sum of money in advance and the value of

the goods in question was payable to him in the event of their loss or destruction.

In 1574 a Chamber of Surance was established at the law exchange of London. This was a

specialised section to deal with insurance transactions. By 1575 insurance contracts had been

standardised and subject to registration. This was necessary to prevent fraudulent practices by

insurers. The Chamber of surance and the registration of insurance contracts was formalised bythe Francis Bacon Insurance Registration Act 1601. The statute created a special court to deal

with disputes in insurance. Before 1720 there were minimal attempts to regulate insurance

business by statute and insurance was essentially in the hands of individuals and the Lloyds of

London.

The South Sea Bubble scam of 1720 revealed the dangers of unregulated business. This led to

the enactment of the South Sea Bubble Act and the incorporation of 2 insurance companies i.e.

the Law Exchange Assurance Corporation Limited for marine insurance and the London

Assurance Corporation for Life Insurance.

The London fire Assurance Company was incorporated in 1772 after the great London fire.

Thereafter significant attempts were made to regulate insurance business by legislation for


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example the Marine Insurance Act 1746 addressed marine insurance while the Life Assurance

Act 1774 dealt with life insurance. Development in marine insurance culminated in the

codification of the law in the marine insurance Act 1906.

In Kenya the British introduced commercial practices similar to those in Britain when Kenya

became a protectorate and English law was made applicable by the reception clause in the orders

in council and subsequently by the Judicature Act 1967. Insurance business in Kenya was

introduced by the British and other foreigners who established branches of large insurance

companies or acted as agents. Evidence shows that as early as 1887 an English insurance

company had an office in Zanzibar.

The first insurance office was opened in Kenya in 1891 and by the end of the first world war a

number of British Insurance Company had representatives or agencies in Kenya. However it

was not until 1930 that a locally incorporated company joined the market i.e. Pioneer General

Assurance Society. Although insurance activities gained momentum during the 40s and the

50s it was exclusively in foreign hands and called for minimal regulation.

However in 1945 the African Life Assurance (Control) Ordinance was promulgated to control

insurance services to Africans. Under this Ordinance insurers were prohibited from extendinginsurance cover to Africans unless the proposal form had been approved by the District

Commissioner. This ordinance has since been repealed. The Insurance Companies Act 1960 did

not address the question of regulation of the insurance industry.

The Marine Insurance Act was enacted and came into force on November 22 1968. This Act is a

carbon copy of the English Marine Insurance Act 1906. It generally addresses questions of

substantive law.

After independence insurance business prospered and the state demonstrated its desire to

participate in the business by forming the Kenya National Assurance Co. in 1965 which

dominated Insurance Business for many years.


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In 1972 the Kenya Re Insurance Corporation was established to transact re insurance business.

Regulation of insurance business in Kenya reached its climax in 1984 with the enactment of the

Insurance Act Cap 487 which came into force on January 1st1987. The statute was hailed as a

landmark in the regulation of the insurance sector. The objective of the Act was to amend and

consolidate the law on insurance and to regulate insurance business in Kenya. It was based or

inspired by the English Insurance Companies Act 1982.

The statute was intended to put into place an effective regulatory structure so as to consolidate

the mutual good in the sector with a view to making the industry more productive and beneficial

to the country. Some half-hearted attempts were made to Kenyanise the industry.

The most important innovation was the establishment of the office of the Commissioner of

Insurance upon which the statute confers draconian powers in the management of the insurance

industry. The statute makes minimal attempts to modify the substantive principles of insurance.

However, it makes provision for solvency margins investment by insurance companies, Kenya

Re Insurance Corporation, payment of claims, insurance advisory board.

Under Section 169(1) of the Act the Insurance Appeals Tribunal is established as a specialised

court to determine disputes between the commissioner of insurance and the insurance industry.

GENERAL ATTRIBUTES AND TRENDS IN INSURANCE BUSINESS IN KENYA

Insurance is an integral part of commercial processes and develops in the womb of capitalism. It

is a service industry whose object is to promote the broad aims of capitalism as a mode of

production. The insurance industry in Kenya is profit motivated. Insurance funds are pooled

and invested to enhance the profitability of insurance companies.

The rules and principles which regulate insurance evolve to give effect to the profit

maximization objects for example the basic insurance principles of indemnity subrogation,

salvage, contribution and apportionment are tailored to ensure that the insurer makes a profit.

The basic rules and principles of insurance evolve as customs and usages of marine insurance


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and tend to be one sided. As a consequence of the colonial legacy, there has been heavy leaning

towards Britain in terms of insurance practices and the law.

For many years the industry was dominated by English insurance companies for example in 1967

out of 37 companies, 30 were British. In 1985 out of 43 companies only 20 were locally

incorporated. The scenario has since changed in that the number of locally incorporated

companies has increased and so is the quantum of business transacted.

The law and principles of insurance are predominantly non-local for example the Marine

Insurance Act cap 390 is a carbon copy of the English Marine Insurance Act 1906. The

Insurance Act Cap 487 is based on the English Insurance Companies Act 1982.

The Insurance Industry tends to be concentrated in urban areas partly due to the colonial legacy

of introducing the money economy first in the urban areas and hence the overall development of

the economy. The industry has restricted itself to areas in which the money economy is

predominant thereby ignoring the predominant subsistence economy. Agricultural insurance

remains contentious and the minimal business transacted is on experimental basis. The native

population has not been actively involved in the utilisation of insurance services. This is partly

by reason of ignorance and patterns of property ownership.

However at the national level, the insurance industry has contributed enormously. Statistics

show that it accounts for about 20% of the gross national product in terms of revenue.

ROLE OF INSURANCE:

1. Source of revenue for the state;

2. Source of employment;

3. Encourages investments;

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

5. encourages savings

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


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CHALLENGES FACING THE INSURANCE INDUSTRY IN KENYA

1. Ignorance

2. Government or State Control;

3. Low levels of income;

4. HIV Aids

5. Fraud;

6.

Insurance Law-Lecture 4

10 July 2004

THE NATURE AND SCOPE OF INSURANCE CONTRACT

Jupiter General Insurance Co v Kassanda Cotton. Case shows that you can have an oral

contract. But in practice today that is not possible. The contract must be embodied on a

document, some note or memorandum. But the law does not require a written contract: the

general principles of contract apply.

The contract of insurance must satisfy the basic requirement of a contract at common law. That

is an offer by one party must be unequivocably accepted by the insurer consideration must befurnished, the parties must have intended their dealings to give rise to a contract and the purpose

of the agreement must have been legal.


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A contract of insurance is generally not subject to any legal formalities. See the case ofJupiter

General Insurance Co v Kassanda Cotton (1966) EA 252; Murfit v Royal Insurance Co (19.22)

38 TlR 334; Ackmanm v Policyh holders protection Bound (1992) 2 Lloyds Ref 221

However marine insurance contracts must be written. Section 22 (1) of the Marine Insurance Act

provides that acontract of marine insurance is inadmissible in evidence unless it is embodied in a

policy in accordance with the Act. Under section 23 the policy must certify:

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

2. subject matter of the insurance and the risk insured against, the voyage, period of time or both as

covered by the policy, sum or sums insured

3. particulars of the insurer

Under section 24 the policy must be signed by or on behalf of the insurer. Life, fire and other

types of insurance are not subject to such statutory formalities. However, under the stamp duty

act section an insurer policy must have a duty imprint on its face failing which it is inadmissible

in evidence and the insurer is liable to a fine. In insurance contracts the offer is made by the

proposer by completing and submitting the proposal form to the insurer. The proposal form is

standard and its terms are not subject to bargain or negotiation. The proposers offer must be ascomplete as possible in materiality and must be communicated to the insurer. The proposer must

have an insurable interest in the subject matter. The proposal form is the document furnished by

the insurer for completion by the proposer and varies in form and content depending on the

character of cover sought. It solicits specific information in relation :

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

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

duration of cover.

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

4. history of the subject matter, for example, whether risk has previously attached, previous

insurance, refusal to insure if any, cancellation of insurance, etc. (these are material facts)


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The contents of the proposal form enable the insurer make a fair decision on whether or not to

take the risk and how much premium to charge. In addition, the proposer declares that the

information provided is true and forms the basis of the contract between them. Re Yagar v

Guardian Assurance Co (1912) 108 MT 38; Stir Fire and Burglary Insurance Co v Davidson

(1902) 5 AS 38; Interfoto Picture Library Ltd v Silhouette Visual Programmes Ltd (1989) QB

433; Rust v Abbey Life Assurance Co. (1979) 2 Lloyds Report 334.

Submission to the insurer of a completed proposal form constitutes the formal offer by the

proposer and if accepted a contractual relationship exists between them. Before cover is extended

the insurer must ascertain whether the offer is worth during which time the proposer may remain

uninsured. In property insurance insurers grant a cover note in the meantime. This is a technical

terms used to describe the temporal insurance cover extended to the proposer between

presentation of the proposal form and its acceptance of rejection. It is argued that

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

undertaken.

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

3. as explained in the case of Julian Bright v HG Poland (1960) Lloyds Report 420 the typical

motorist is impatient and requires immediate cover before the traditional steps are followed. Thecover note needs not be a formal note; it suffices if the insurer intimates to the propose that cover

has been extended from a particular date. See case of Murfit v Royal Insurance Company Ltd, it

was held that a letter from the head office of the company indicating that cover had been

extended in a particular situation constituted a cover note. The cover note operates as a contract

between the proposer and the insurer on the terms and conditions embodied therein or imputed

from the type of the policy applied for. The insured is entitled to enforce the contract evidenced

by a cover note should the risk attach. If the document is comprehensive the insured recovers on

the basis on its terms and conditions, if not he recovers on the terms of the policy applied for.

The cover note is ordinarily effective for 30 days. Under section 75 of the Stamp Duty Act a

policy should be insured within 30 days of receipt of the proposal form. However in practice its

duration varies. If the insurer declines to take the risk such refusal must be communicated to the

proposer so as to bring to an end the effect of the cover note. Cartwright v MacCormack


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Trafalgar Insurance Co. (1963) 1 All ER. The court of appeal stated inter alia that an insurer

must signify his rejection of the proposal form expressly in order to bring to an end of the

binding nature of the cover note. The legal effect of the cover note lapses when the insurer issues

the policy. The effect of the policy is backdated to the date of the cover note. Jadavyi v Shanji

Panday v Oriental fire and General Insurance Co (1957) EA 21; General Re-Insurance Case

(1982) QB 1022, Stockton v Mason (1978) 2 LR 43

Acceptance of proposal form

An insurer is not bound to accept any proposal form. He has the sole prerogative to accept or

reject the offer. However, refusal must be communicated promptly. The insurer cannot while

accepting the proposal form vary its terms without the concurrence of the proposer. An insurance

may signify acceptance of the proposal form in various wasys:

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

2. issue of the policy. Generally issuance of the policy by an insurer is conclusive evidence of

acceptance of the proposal form. The policy becomes effective from the date of issue

notwithstanding any defects in the proposal form. See McElroy v London Assurance Corporation

(1894) 24 Lloyd Report 287. where the proposer had not signed or authenticated the proposal

form but the insurer issued a policy. A subsequent attempt by the insurer to cancel the policy on

the ground of the defect in proposal form failed. It was held that the policy was binding as its

issue was conclusive evidence that the insurer had accepted the proposal form. However, issue of

the policy is not conclusive evidence if

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

2. where the policy departs from the terms and conditions of the proposal form by introducing new

terms. Pear Life Assurance Co. v Johnson (1909) 2 KB 88

3. by conduct. The fact that the insurer has not communicated with the proposer or has not issued a

policy does not necessarily mean that cover has not been extended. The insurers conduct may be

unequivocal that there is cover. Jupiter v General Insurance; Adie and Sons v Insurance

Corporation Ltd (1898) 14 TKR 554; Re Yager Guardian


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4. acceptance of premium. Acceptance and retention of premium by the insurer gives rise to a

presumption of an acceptance of a proposal form. However, such acceptance and retention does

not impose a duty on the insurer to issue a policy. In McElroys Case, Lord Maclaven observed in

page 291: The company is not bound to deliver a policy without the payment of the premium. If

they accept a premium before delivering a policy I should be disposed to hold that the acceptance

of the premium and the delivery of the receipt therefore was sufficient to create the obligation to

issue a policy unless circumstances can be shown to the contrary.

Acceptance of the proposal form marks the end by the insurer of the proposers duty to disclose

material facts. As a general rule the insurer cannot avoid the contract on the ground of

nondisclosure of facts discovered after acceptance of the proposal form. Whitewell v Auto Car

Fire and Accident Insurance Co (1927) 27 Lloyds Ref 41); Re Economic Fire Office (1896) 12

TLR 142; Harrington v Pearl Life Assurance Co (1913) 30 TLR 24.

Commencement of cover

Commencement of cover determines the time from which the insurer is obliged to pay the sum

assured or indemnity should the risk attach. The date and time of commencement of cover is

critical. As a general rule cover commences at the time and date specified by the cover note or

policy. If silent on the time or in cases of ambiguA full day isCartwright v Mac Cormack

Traflage Insurance Co. Ltd. An insurance company issued a cover note to a motorist stating that

effective time and date of commencement as11.45 a.m. on decdember 2 1959. The cover note

stated this cover is only valid for 15 days from the commencent date of risk. Under no

circumstances is the time and date of commencement of risk to be prior to the actual time of

issue of this cover note. In any event the duration of this cover note shall bnot be more than 15

days from the date of commencement kof the insurance stated herein. The motorist was

involved in an accident at 5.45 p.m. on December 17 1959. Question was whether the insurer

was liable to indeminify the insured. Was the company liable, that is the question? The question


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will depend on thewhen cover commenced. ity cover commences at the beginning of the enext

full day.

Catwright V.

After reviewing a number of authorities Harman L.J. observed (p1415) these cases seem to me

to show that generally speaking when a day is mentioned from which the time is to start running,

fractions of a day ought to be disregarded and time should run from midnight and therefore the

15 days is to be calculated from midnight on the commencement day;

The court of Appeal was of the view that the dispute was on a question of construction of the

policy and on its true construction the insured was covered when risk attached. Refer to Hayman

V. Dowins [1942] A.C. 356 AND Stewart V. Chapman 1951] 2. All E.R. 613

Hercules Ins. Co. V.l Trivedi and Co. Ltd. [1962] EA 348, Cornfoot V Royal Exchange Ass.

Corporation [1904] 1 K.B. 40

TERMINATION OF INSURANCE CONTRACTS:

How may an insurance contract be terminated.

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

contracts;

(b) Operation of Law circumstances render it impossible for sustenance of the policy i.e.

liquidation or winding up of the insurance company or transfer of subject matter refer to

Kinyanjui V South India Insurance Co. [1968] WA 160;

(c) Mutual consent (Agreement at the instigation of either party) consent or intimation to

terminate must be in writing. In life insurance under S. 89 it is possible to instigate termination

of the contract. The caveat is that if the insurance is terminated before 3 years lapse there is


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nothing payable but after 3 years there is a surrender value payable of three quarters of the

premium.

(d) Indemnity or payment of the sum assured terminates the contract of insurance. If the subject

matter is destroyed, it terminates the insurance or when the endowment policy matures we

terminate the policy.

(e) Breach of conditions or warranties i.e. non-disclosure of material facts or misrepresentation of

material facts refer to Jubilee Insurance Co. V John Sematengo [1965] the Plaintiff Insurance

company filed a suit against the Defendant for a declaration that the company was entitled to

avoid a motor insurance policy on the ground that it had been obtained by non-disclosure of

material facts and misrepresentation of facts. The insured had inter alia failed to disclose the

facts that the subject matter of insurance had been involved in an accident a day before it was

insured and that it had a major mechanical defect. It was held that the insurance company was

entitled to avoid the contract. Sir Udo Udoma said the Plaintiff company is entitled to the

declaration sought because it has satisfactorily discharged the onus which is upon it of

establishing by a preponderance of evidence that the insurance policy and the certificate were

obtained by the Defendant by the non-disclosure of a material fact or by a representation of facts

which was false in some particular. The other case is The Motor Union Insurance Co. V AKDdamba [1963] EA 271. Peters V. General Accident and Life Assurance Co. [1937] 4 All E.R.

this case illustrates termination by operation of law -

CONSTRUCTION OF THE INSURANCE POLICY (INTERPRETATION OF THE

INSURANCE POLICY

Construction of an insurance policy is basically construction of a contract

Courts of law are often called upon to construe insurance policies. Such construction may be

necessary to ascertain and give effect to the intentions of the parties as well as enhance

uniformity in the legal effect of terms and clauses used in insurance policies by insurers.


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Application of the Doctrine of Precedent: (Stare Decisis)

As a general rule where courts have already construed or decided the meaning of words and

phrases used in a policy of insurance, the doctrine of precedent applies in subsequent similar

cases and a similar construction is given. In the words of Park B. in Glenn V Lewis [1853] 8

Exch. 607 If a construction has already been put on a phrase or clause in a contract of

insurance the same should be given in subsequent similar cases. However in the words of Lord

Atkin L.J. in Re Calf and Son Insurance Office [1920] 2 K.B. 366 On a question of

construction I protest against one case being treated as an authority in another unless the

language and the circumstances are substantially identical. That question was also addressed in

the following cases

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

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

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

1. Intention of the Parties:

It is a fundamental rule of construction that the intention of the parties prevail. Such intention is

discernible from the policy itself and the documents incorporated therewith if any. Courts are

discouraged from speculation but reference to surrounding circumstances may be made for

example a previous construction of similar terms or phrases.

2. The wholistic Rule

a policy of insurance must be interpreted in its entirety. In the words of Lord Atkin L.J. In

Hamlyn V. Crown Accidental Ins Co. [1893] 1 Q.B. 750 You must look at the document as a

whole. All words and phrases must be interpreted and none ought to be rendered meaningless

without good cause. Generally the policy should be interpreted to give all clauses a positive

meaning so as to give effect to the intentions of the parties.


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3. Literal Rule

Words and phrases should be given their ordinary or natural meaning and sentences their

ordinary grammatical meaning. Application of this rule is justified on the premise that insurance

practices and usages evolved in the course of ordinary commercial transactions. In the words of

Devlin J. in Leo Rapp Ltd V. Mclure [1955] Lloyds Rep 292 he stated when the court is

construing words in an insurance policy, it must give them their ordinary natural meaning. In

the case of Thompson V. Equity Fire Insurance Co. Ltd [1910] A.C. 592

However, technical meanings must not resulted to unless necessary to amplify the ordinary

meaning of the words. Nevertheless technical words and phrases must be given their technical

meaning. Technical legal terms must accorded their strict technical meaning. The case of

London & Lacanshire Fire Insurance Co. V. Bolands [1924] A.C. 836

4. Ejusdem Generis Rule

This rule is used to interpret things of the same kind genres or species. If the policy is

inexhaustive words and phrases must be interpreted within the same class genres or species. Theunidentified or instances must be interpreted ejusdem generis the words before them. Refer to

King V. Travellers Ins. Co. [1931] 48 L.T.L 53 The Plaintiff took out an insurance policy

covering jewellery, cameras, field glasses, watches and other fragile or specially valuable

articles. The Plaintiffs fur coat was stolen. On a claim of indemnity under the policy, the

insurer averred that the court was not within the same genus though it was a household item. It

was held that the fur coat did not fall within the same class as the items enumerated by the policy

and the insurer escaped liability.

This rule is only applicable where specifications of particular things belonging to the same genus

precede a word of general signification. Refer to the case of Mair V. Railway Passengers Ass

Co. [1877] 37 LT 356


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

This rule is to the effect that where a word of general signification is followed by words of

limitation or definition, the first word is construed as limited and applying only to the particulars

specified.

Where a policy contains conflicting words, phrases or sentences, the court must construe the

same so as to give the policy (through reconciliation) a positive legal meaning. Where the

conflicts are irreconcilable courts have evolved several rules of construction. However if the

intentions of the parties can be ascertained, any repugnancy in the contract may be disregarded.

Minor Rules

(a) Written words prevail over printed terms though both are manifested or expressed, greater

consideration ought to be given to written words or clauses. Refer to the case of Yorkshire Ins

Co V Campbell [1917] A.C. 218

(b) Express terms override implied terms. Where all terms are printed latter terms are given more

effect in the case of a conflict on the premise that they are intended to qualify the former.

(c) Parole Evidence Rule: where contractual terms are written as a general rule parole evidence is

inadmissible to vary or change the written terms. However, such evidence may be admissible to

demonstrate the circumstances in which the contract was entered into. In an insurance contract

such evidence may be admitted to establish a trade usage or custom in insurance.

(d) Contra Proferenterm Rule: in the words of Roche J. Simmonds V. Cockell [1920] 1 K.B. 843

845 the judge stated it is a well known principle of insurance law that if the language of a

warranty in a policy is ambiguous, it must be construed against the underwriter who has drawn

the policy and inserted the warranty for his own protection. This rule of construction is

applicable if the policy contains vague or ambiguous words or sentences. They must be

construed contra proferentes (restrictively against the party relying on them) See Houghton V.


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Trafalgar Ins Co [1954] K.B. 247 [1953] 2 L.R. 503. A motor insurance cover excluded loss,

damage and/or liability caused or arising while the car is conveying any load in excess of that for

which it was constructed. At the material time the vehicle hada driver and 5 passengers. It was

involved in an accident. The insurer disclaimed liability citing the above clause. The court

relied on the contra proferenterm rule and found the insurer liable. In the words of Sommervel

L.J. If there is any ambiguity it is the companys clause and the ambiguity will be resolved in

favour of the assured. English V. Western [1940] 2 K.B. 156.

PRINCIPLES OF INSURANCE:

Insurable Interests:

Insurable interest is the very basic principle of insurance. The phrase insurable interest is that

which we are likely to lose if loss occurs. It is the one that propels us to take out insurance.

This is one of the basic requirements of a contract of insurance. The insured must exhibit an

insurable interest in the subject matter at one time or another failing which the contract is invalid.

In Anctil V. Manufacturers Life Ins Co. [1899] A.C. 604 Insurable interest is the pecuniary or

proprietary interest which is at stake or in danger if the subject matter is uninsured. The classicaldefinition of insurable interest was given by Lawrence J. in Lucena V. Craufurd [1806] 2 Bos &

PNR 296 A man is interested in a thing to whom advantage may arise or prejudice happen

from the circumstances which may attend it and whom it importeth that its condition as to

safety or other quality should continue, interest does not necessarily imply a right to the whole

or a part of a thing, nor necessarily and exclusively that which may be the subject of privation,

but the having of some relation to, or concern in the subject of the insurance which relation or

concern by the happening of the perils insured against may be so affected so as to produce a

damage detriment or prejudice to the person insuring, and where a man is so circumstanced with

respect to matters exposed to certain risks or damages or to have a moral certainty of advantage

or benefit, but for those risks or dangers, he may be said to be interested in the safety of the

thing. To be interested in the preservation of a thing is to be so circumstanced with respect to it

as to benefit from its existence, prejudice from its destruction. The property of a thing and the


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interest devisable from it may be very different, of the first, price is generally the measure, but by

interest in a thing every benefit or advantage arising out of or depending on such thing may be

considered as being comprehended.

After reviewing a number of authorities Harman LJ observed: These cases seem to me to show

that generally speaking when a day is mention from which the time is to start running fractions

of a day ought to be disregarded and time should run from midnight and therefore the 15 days is

to be calculated from night on the commencement day.

The Court of Appeal was of the view that the dispute was on a question of construction of the

policy and on its construction the ensured was covered when risk attached. See the following

cases:

Hayman v Dowins (1942) AC 356

Steward v Chapman (1951) 2 All ER 613

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

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

Termination of insurance policies

How can an insurance policy be terminated?

1. Lapse of time

2. Operation of lawLiquidation of insurance companytransfer of subject matter. See the caseof Kinyanjui v South India Insurance Co. (1968) EA 160.

3. Mutual consent-agreement-must be written. It is easier to surrender an indemnity insurance. In

life policy you get nothing if the insurance premium have not be paid.


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

5. Breach of conditions or warranties, such as non disclosure and misrepresentation(See Jubilee

Insurance Co. v John Sematengo (1965).. the plaintiff insurance company filed a suit against the

defendant for a declaration that the company was entitled to avoid a motor insurance policy on

the ground that it had been obtained by non disclosure of material facts and misrepresentation of

facts. The insured had inter alia failed to disclose the fact that the subject matter had been

involved in an accident a day before it was insured and that it had a major mechanical defect. It

was held that the insurance company was entitled to avoid the contract. Sir Udo Udoma: the

plaintiff is entitled to the declaration sought because it has satisfactorily discharged the onus

which is upon it of establishing by a preponderance of evidence that the insurance policy and the

certificate were obtained by the defendant by the non disclosure of material facts or by a

misrepresentation of facts which was false in some material particular.

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

Peters v General Accident and Life Assurance Co

Construction of the Insurance policy

Courts of law are often called upon to construe insurance policies. Such construction may be

necessary to ascertain and give effect to the intentions of the parties as well enhance uniformity

in the legal effect of terms and clauses used in insurance policies by insurers.

Application of the principle of precedent


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As a general rule where courts have already construed the meaning of words or phrases used in a

policy of insurance the doctrine of precedent applies in subsequent similar cases and a similar

construction is given. In the words of Park B in Glen v Lewis (1853) 8 Exch. 607: If a

construction has already been put on a phrase or clause in a contract of insurance the same

should be given in subsequent similar cases.

However, in the words of Alkin LJ in the case Re Calf and Sun Ins. Office (1920): On a

question of construction I protest against one case being treaty as an authority in another unless

the language and the circumstances are substantially identical. Also see the case of Louden v

British Merchants Ins. Co. (1961) 14 Lloyds Rep. 155; and

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

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

I ntention of the parties

It is a fundamental rule of construction that intention of the parties prevail. Such intention is

discernible from the policy itself and the documents incorporated therewith if any. Courts are

discouraged from speculation but reference to surrounding circumstances may be made. For

example a previous construction of similar term or phrases.

The holistic rule

A policy of insurance must be interpreted in its entirety. In the words of Alkin LJ in Hamlyn v

Crown Accidental Ins. Co (1893) IQ 750: You must look at the document as a whole.

All words and phrases must be interpreted and non ought to rendered meaningless without good

cause. Generally the policy should be interpreted to give all clauses a positive meaning so as to

give effect to the intentions of the parties.

The literal rule


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Words and phrases should be given their ordinary or natural meaning and sentences their

ordinary grammatical meaning. Application of this rule is justified on the premise that insurance

practices and usages evolved in the cause of c=ordinary commercial transactions. In the words of

Devlin J in Leon Rapp Mclure (1955) Llyods r 292 When the court is construing words in an

insurance policy it must give them their ordinary natural meaning.

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

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

meaning of the words

Nevertheless technical words and phrases must be given their technical meaning. Technical legal

terms must accorded their strict technical meaning. See case of London and Lacanshire Fire Ins

Co v Bolands (1924) AC 836

Ejusdem generis

This rule is used to interpret things of the same kind, genus or species . If the policy is

inexhaustive words and phrases must be interpreted within the same class genus or species. The

undentified facts or instances must be interpreted ejusdem generis the words before them. See

King v Traveller Ins. Co. (19310N 48 ltl.. THE plaintiff took out an insurance policy covering

jewellery, cameras, field glasses, watches and other fragile or specially valuable article. Theplaintiffs fur coat was stolen. On a claim of indemnity under the policy the insurer averred that

the coat was not within the same genus though it was a household item. It was held that the fur

coat did not fall within the same class as the items enumerated by the policy and the insurer

escaped liability. This rule is only applicable where specifications of particular things belonging

to the same genus precede a word of general signification. See Mair v Railway Passengers Ass

Co (1877) 37 LT 356.

Expressio unius est exclusio ulterius.

This rule is to the effect that where a word of general signification is followed by words of

limitation or definition the first word is construed as limited and applying only to the particulars

specified. Where a policy contains conflicting words phrase or sentences the court must construe

the same so as to give the policy a positive legal meaning. Where the conflicts are irreconciliable


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courts have evolved several rules of construction. However if the intention of the parties can be

ascertained any repugnancy in the contract may be disregarded.

First, written words prevail over printed terms though both are expressed greater consideration

ought to be given to written words or clauses. See Yorkshire Ins. Co v. Campbell (1917) AC

218.

Express terms override implied terms. Where all terms are printed latter terms are given more

effect in the case of a conflict on the premises that they are intended to qualify the former.

Parole evidence rule

Where contractual terms are written as a general rule parole evidence is inadmissible to vary or

change the written terms. However, such evidence may be admissible to demonstrate the

circumstances in which the contract was entered into. In an insurance contract such evidence

may be admitted to establish a trade usage or custom in insurance.

Contra proferentem rule

In the words of Roche J in Simmonds v Cockell (1960) IKB 843 at 845: It is a well known

principle of insurance law that if the language of a warranty in a policy is ambiguous it must be

construed against the underwriter who has drawn the policy and inserted the warranty for hisown protection.

This rule of construction of contraction the policy contains big or ambiguous words or sentences.

They must be construed contra proferentes against the party relying on them. See Houghton v

Trafalgar Ins Co (1954) JB 247)..a motor insurance cover note exclude loss, damage and or

liability caused or arising while the car is conveyed any load in excess of that for which it was

constructed at the material time the vehicle had a driver and five passengers. It was involved in

an accident. The insurer disclaimed liability citing the above clause. The court relied on the

contra profrentem rule and found the insurer liable. In the words of Somervel LJ: If there is any

ambiguity it is the companys clause and the ambiguity will be resolved in favour of the

assured. See case of English v Nelson (1940) 2 KB 156


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Principles of Insurance

Insurable interest

This is one of the basic requirements of a contract of insurance. The insured must exhibit an

insurable interest in the subject matter at one time or another, failing which the contract is

invalid. See case of Anctil v Manufacturers Life Insurance Co. (1899) Insurable interest is the

proprietary interest which is tat stake or in danger if the subject matter is uninsured. The classical

definition of insurable interest was given by Lawrence J in Lucena v Crauford (1806) 2 Bos &

PNR: A man is interested in a thing to whom advantage may arise or prejudice happen from thecircumstance that may attend it and whom it is importeth that it condition as to safety or other

quality should continue, interest does not necessarily imply a right to the whole or a part of a

thing, nor necessarily and exclusively that which may be the subject of privation but the having

of some relation to, or concern in the subject of the insurance, which relation or concern by the

happening of the perils insured against may be so affected so as to produce a damage, detriment

or prejudice to the person insuring, and where a man is so circumstanced with respect to matters

exposed to certain risks or damages or to have a moral certainty of advantage or benefit, but for

those risks or dangers he may be said to be interested in the safety of the thing. To be interested

in the preservation of a thing is to be so circumstanced with respect to it as to benefit from its

existence, prejudice from its destruction. The property of a thing and the interest devisable from

it may be very different, of the first, price is generally the measure, but by interest in a thing

every benefit or advantage arising out of or depending on such thing may be considered as being

comprehended.

Medievalwager insurance possible.

This definition of partially adopted by the Marine Insurance Act 1906. A person is deemed to

have an insurable interest if in the subject matter if he is likely to suffer prejudice in the events of

its loss, damage or destruction.


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Insurable interest is essentially the pecuniary or financial interest in danger. To ascertain whether

a person has an insurable interest courts have abstracted the following rules

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

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

3. the insureds right of interest must be capable of financial or pecuniary estimation

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

As a general rule insurable interest ought to have a pecuniary value. See Hafford v Kymer (1830)

10 B and C 742 However it need not be permanent of continuing. A right to a future interest or

possession is insurable. However a mere expectation of acquiring an interest is not insurable. See

Stockdale and Co v. Dunlop (1840) 6 M and W 224.

Medieval common law did not insist on the presence of insurable interest on the part of the

insured. Its requirement is for the most part statutory. For example under section 41 of Marine

Insurance Act 1746 insurable interest was made a prerequisite of marine insurance by the

provision to the effect that every contract of marine insurance by way of gaming or wagering is

void. This requirement was extended to life insurance by the Life Assurance Act 1774 which

provided inter aliano insurance shall be made by any person or persons on the life or lives ofany person or persons or any other event or events whatsoever wherein the person or persons for

whose use, benefit or on whose account such policy or policies shall be made shall have no

insurable interest.

The requirements of insurable interest was extend to all categories of Insurance by the Gaming

Act 1845. Under section 5 (1) of the Marin Insurance Act and section 94(1) of the Insurance Act

the insured must have an insurable interest in the subject matter.

Who has an insurable interest?

Insurance Co Ltd v Stimson(1888) 103 US 25 471, where a contractor insured a hotel after its

completion but before handing it over to the owner and the building was subsequently destroyed

by fire before the policy lapsed. It was held that the contractor had an insurable interest by virtue


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of the mechanics lien. However in Stockdale v Dunlopwhere the plaintiff had insured the value

and profit of palm oil he had verbally agreed to buy from a company while the ships were on the

high seas but one went missing. A claim for indemnity failed as the insured had no insurable

interest in the oil. A similar holding was made inMacaura v Northern Assurance Co. Ltd(1925)

AC 69 where the insured had taken out a policy over the companys timber.

In Thomas v Continental Creditors Ltd(1976) AC 346 it was held inter aliathat a creditor had

an insurable interest in the life of a debtor to the extent of the debt. InHebdon v West(1863) 3 B

and C 579 it was held that an employer has an insurable interest in the life of an employee to the

extent of the services rendered. In addition, an employee has an insurance interesting the life of

the employer to the extent of their relationship.

In Griffith v Flemming(1909) 1 KB 805 it was held that a husband has an insurable interest in

the life of his wife and vice versa.

In Sat Dev Sharma v The Home Insurance Co of New York(1966) EA 8 it was wrongly held that

the proprietor of a driving school had no insurable interest in the life of his instructors. InHarse

v Pearl Life Insurance Co(1904) 1 KB 558 where an agent in honest belief that the insured had

an insurable interest in the mothers life persuaded him to take out a policy on funeral expensesbut subsequently sought to recover the premiums on the ground that the contract was void, it was

held that there were irrecoverable as he had no insurable interest in the life insure (because both

parties were inpari delicto). However in cases of active fraud by an insurance agent premiums

paid are recoverable. As happened in the case of Hughes v Liverpool Insurance Law-Lecture 24

July

Victoria Legal Friendly Society (1916) 2 KB 482 where the defendants agents fraudulently

induced the plaintiff to take out an insurance policy wherein he had no insurable interest. The

court of appeal held that he was entitled to the premiums paid as the parties were not inpari

delicto. In the words of Bankes LJ p-496: The authorities seem to me to be all one way, namely

that an innocent plaintiff is entitled to say that he is not inpari delictowith the defendant whose

agent by false and fraudulent misrepresentation induced him to believe that the transaction was

an innocent one.


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Sections 7 to 15 of the Marine Insurance Act , cp 390 and section 94 (2) of the Insurance Act set

out circumstances in which persons have insurance interest in the subject matter. SeeNewbury

International Ltd v Reliance National (UK)(1994) 1 Lloyds Rep 83;Fuji Finance Inc v Aetna

Life Insurance(1997) Ch 173; Glengate v Norwich Union Ins. Society (1996) 1 Lloyds 278;

Colonial Mutual General Ins v ANZ (1995) 1 WLR 1140.

Nature of insurable interest

As a general rule the insured is not obliged to declare the nature or extent of the insurable

interest in the subject matter. Section 26 (2)OF THE marine Insurance Act provides that the

nature and extent of the interest of the assured in the subject matter insured need not be specified

in the policy. This is because insurers are generally more concerned with the sums payable or

indemnity under the policy. However a description of the nature and extent of insurable interest

is necessary:

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

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

3. where the subject matter involves precarious loss.\

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

1. In indemnity contract, e.g. marine, burglary, etc insurance interest must exist when risks

attaches. Section 61 of the Marine Insurance Act embody this rule. See Stockdale v Dunlop.

2. In life insurance the insured must furnish insurable interest when the contract is entered into. It

was so held inDalby v India and London Life Assurance Co.(1854) 15 CB 365

3. In statutory policies the insured must furnished insurable interest at the time stipulated by the

statute. For example, in third party motor insurance the insured must have an insurable interest

when loss occurs.


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Role of insurable interest

1. It establishes a nexus between the insured and the subject matter in that the insured starts to

suffer prejudice in the event loss or destruction of the subject matter

2. It confers upon the insured the requisite locus standi to sue on the policy. Cosford Union and

Others v Poor Law and Local Government Officers Mutual Guarantee Asso. Ltd(1910) 103 LR

463.

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

The doctrine of non-disclosure

The insured duty in insurance not to misrepresent any facts extents to a duty to disclose material

facts. An insurance contract if vitiated by misrepresentation is voidable at the option of the

innocent party and a claim in damages is sustainable if the misrepresentation was fraudulent.

Additionally the insurer is entitled to retain any premium paid. The insurance contract is the best

illustration of the contract uberrima fides. It is an exception to common law principle of caveat

emptor. Both parties are bound to disclose material facts. It has been observed that good faith

forbids either party by concealing what he privately knows to draw the other into a bargain from

his ignorance of that fact and his believing the contrary.

The duty of disclosure in insurance is voluntary. It was first explained by Lord Mansfield inCarter v Boehm(1766)3 Bun 1905. He said: Insurance is a contract upon speculation. The

special facts upon which the contingent chance it to be computed lie more commonly in the

knowledge of the insured only. The underwriter stiwrre to his and proceeds upon confidence that

he does not keep back any circumstance in his knowledge to mislead the writer into a belief that

the circumstance does not exist and to induce him to estimate the risk as it did not exist. The

keeping back such a circumstance is fraud and therefore the policy is void.

Words to the same effect were expressed by Lesselm MR in London Assurance Co Ltd v Mansel

(1879) 11 Ch D 363. In Joel v Law Union and Crown Ins. Co (1907) 2 KB 863, Flecher Moutton

observed In policies of insurance whether marine or life there is an undertaking that the contract

is uberrima fides, that is if you know any circumstance at all that may influence the

underwriters opinion as to the risk he is undertaking and consequently as to whether he will it or


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at what premium you will state what you know. There is an obligation to disclose what you

know and the concealment of a circumstance known to you whether you thought it material or

not avoid the policy.

Cases decided after Carter v Boehm appeared to place a heavier duty of disclosure on the

insured. In the words of Cockburn CJ in Bates v Hewett (1867)LR 2QB 595: No proposition of

insurance law can be better established than this that the party proposing the insurance is abound

to communicate to the insurer all matters which will enable him to determine the extent of the

against which he undertakes to guarantee the insured. Words to this effect were expressed by

Kennedy LJ in London General Omnibus v Holloway (1912) 2KB 72.

Banque Keyser Ullman SA v Skandia (UK) Ins Co and Others (1987) 2 All Er 923, it was held

that the duty of utmost good faith existing between an insurer and an insured in relation to

contract of insurance was reciprocal and required the disclosure of all the material circumstances

particularly those peculiarly within the knowledge of one part. Steyn J: Indeed it is difficult to

imagine to imagine a more retrograde step, subversive of the standing of our law and our

insurance markets than a ruling today that the great judge in Carter and Boehm erred in stating

that the principle of good faith rests on both parties>

Home v PolandPrudent insurer

Disclosure

Banque F inanciere de la cite SA v Westgate

(1991)


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The duty to disclose depends on the knowledge of the parties but both are obliged to disclose

material facts within their actual and presumed knowledge.Economides v Communal Union Ass

Plc(1997) All ER

The parties must disclose material facts within their actual knowledge at the time and those

which they ought in the course of business to have known. A party cannot escape liability for

non-disclosing a fact which he ought to have known at the time of the contract. Only material

facts ought to be disclosed. These are facts relevant to the risk in question

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

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

A fact is material if a reasonable person would known that underwriters would naturally be

influence in deciding whether to accept the risk and what premium to charge by those

circumstances. The fact that they were kept in ignorance of them and indeed were misled is fatal

to the plaintiffs claim. The plaintiff was making a contract of insurance and if he failed to

disclose what a reasonable man would disclose he must suffer the same consequences as any

other person who makes a similar contract.

2. prudent insurer test. Section 18 (2) of the Marine Insurance Act provides a circumstance is

material if it would influence the judgment of a prudent insurer in fixing the premium or

determining whether he will take the risk. InAssociated Oil Carriers Ltd v Union Insurance

Society of Cantion Ltd, Lord Atkin said:

The insured should disclose facts which should influence the judgment of a prudent insurer in

fixing the premium or determining whether he would take the risk

These facts which an ordinary experience and reasonable insurer would consider material. This

test was adopted in Lamberd v Cooperative Insurance Society(1975) 2 Lloyds Rep 485.


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CTI v Oceans Mutual Underwriting Ass (Bermuda) Ltd (1984) 1 Lloyds. In that case the court

of appeal held that a fact is material if an insurer would have want to know of its existence when

make the insurance. This test appears to place a heavier burden on the insured.

So inPan Atlantic CV Ltd v Pinetop(1993) ILR 443. The court of appeal held that a fact is

material if a prudent insurer would have treated it as increasing the risk even though he might

have reject the risk or charged a higher premium

Time of disclosure: the duty to disclose exists throughout the negotiation period. Material facts

coming to the knowledge of the parties thereafter need not be disclosed., Lord Blamuel in

Lishman v Northern marine Ins. Co (1875) LR 179. The time up to which it must be disclosed is

the time when the contract is concluded. Any material facts that come to his knowledge or ought

to have come to his knowledge before the contract is finally sealed must be disclosed to the

insurer if the contract must still go on.

The Dova (1989) 1 Lloyds REP 69

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

In rare circumstances the insurer may extend the duty of disclosure by subjecting it to paymentof premium. Looker and Another v Law Union and Rock Ins Co (1928) 1 KB 354. the insurer

may also insist that the duty to disclose will subsist up to the date of issue of the policy. Case of

Allis Chalmers Co v fidelity and Deposit Co of Maryland(1916) 114 LT 433

Effect of non-disclosure

The non-disclosure of a material fact by either parties renders the contract voidable at the option

of the innocent party.London Assurance Co Ltd v Mansel, and Horne v Poland.


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As enunciated in Carter v Boehnthe doctrine of disclosure appeared fair to both parties in that

certain facts may be peculiarly be in the knowledge of one party. However subsequent

developments placed a heavier burden on the insured on the assumption that he has a monopoly

of knowledge in relation to the subject matter. During the mercantile era the doctrine was

justified in that the proposer knew everything about the subject matter while the insurer knew

nothing. This is no longer the case as the insurer has the means and capacity of ascertaining the

factual situation of the subject matter.

The doctrine has been used by insurers to escape liability exploiting the information gap between

what is disclosed and what ought to have been disclosed.

Although the contract of insurance is one of the utmost good faith certain matters need not be

disclosed. For example

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

Act

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

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

Principles of law

3. Indemnity

This is as common law principle by which the insured is not permitted to profit by his

misfortune. It means the function of property insurance is to place the insured

insurance law

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