3) Insurancei) Types of insuranceii) Principles of insurance

INTRODUCTIONRisk and uncertainty are incidental to life. Human beings meet their untimely deaths they suffer from accidents, destruction of property, fire, floods, earthquakes and other natural calamities. Life is therefore uncertain, risky and insecure. Insurance comes into existence as a means to provide against risk and insecurity. Insurance doesn’t eliminate loss but it only spreads the loss over a large number of people, who insure themselves against the particular risk. The main principle of insurance is the spread of risks to a pool. It is a cooperative device to spread the loss caused by risk over a large number of persons who are exposed to the same risk.- Contract of insurance is one whereby a person called the insurer undertakes to make good the loss on the happening of a specified event.- The consideration for a contact of insurance is called ‘premium’ i.e the price mutually agreed between the assured and the underwriter for risk undertaken by the latter.- The person who undertakes to indemnify the other against loss is called Insurer.- The person who is given protection is called insured.- The document in which contract of insurance is contained is called Policy. The policy itself is not the contract but it is the evidence of the contact.- The thing or property insured is known as ‘subject matter’ of insurance.

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

As a general rule, statutes dealing with the regulation of insurance business do not or have not defined the contract of insurance to obviate the danger of excluding contracts within or that should be within their scope. However a definition is essential as insurance business is closely regulated.

In the words of Ivamy, General Principles of Insurance,A contract of insurance in the widest sense of the term may be defined as a contract whereby one person called the insurer undertakes in return for the agreed consideration called the premium, to pay to the other person called the assured, a sum of money or its equivalent on the happening of a specified event

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

Distinction between Insurance and Wagering ContractsA wager is a contract whereby two persons or groups with different views on the outcome of an uncertain event agree that some consideration is to pass depending on the outcome. The contract is speculative and contingent. However it differs from insurance in various ways.1. Wagers are generally unenforceable whilst insurance contracts are enforceable.2. The fundamental distinction between insurance and a wager is the risk in that whereas in insurance risk exists a priori, in a wager there is a deliberate assumption of risk.

3. In wagering contracts neither of the contracting parties has the interest other than the sum to be won or lost depending on the outcome. Payment is dependant upon the event as agreed to by the parties and is not paid by way of indemnity or otherwise. In insurance, the insured has an interest of the subject matter in respect of which he may suffer loss.4. The uncertain event upon which the uncertain event depends is prima facie adverse to the insured’s interest and insurance is effected so as to meet the loss or detriment which may be suffered on the happening of the event. In the words of Blackburn J in Wilson Vs. Jones [1867] L.R. 2 EX 139.5. In wagers it is essential that either party may win or lose depending on the outcome of the uncertain event. In insurance, the insured pays a premium to furnish consideration, it is not dependant upon the event insured against and the insured cannot be called upon to contribute anything more, whether or not the event occurs.

TYPES OF INSURANCEThe types of insurance which are generally available are:Life assuranceThis is a contract by which the insurer, in return for either a lump sum or periodical payments, undertakes to pay the person for whose benefit the policy is effected, a sum of money:- on the death of the person whose life is insured, or- on a specified date, or on the death of the person whose life is insured, whichever happens first.In the case of (a), the policy is called a Whole life policy. In the case of (b), the policy is called an endowment policy.Dalby v The India and London Assurance CoIt was explained that a life assurance policy is not a contract of indemnity. This is because a human being has no market value.

Fire insuranceA fire insurance contract is intended to cover loss caused by fire during a specified period. The word "fire" is usually defined in the policy. A fire insurance policy is a contract of indemnity.

Motor Vehicle InsuranceA motor vehicle insurance contract is one effected pursuant to the Motor Insurance (Motor Vehicle Third Party Risks) Act to cover any liability which a motorist may incur as a result of causing the death or injury of a third party (including other motorists).The third party has a statutory right to sue the insurer direct, and is not affected by the privity of contract rule.

Burglary insuranceA burglary insurance is a contract to indemnify the assured against loss arising from burglary. Such a policy would be voidable at the option of the insurer if the property insured is deliberately overvalued.

Accident insuranceAn accident insurance is a contract by which the insurer agrees to pay a specified sum of money upon the happening of certain events, usually death of the insured in an accident. A smaller sum is usually payable in the event of the insured's disablement (total or partial), either on a monthly or weekly basis. An accident insurance is not a contract of indemnity.

FUNDAMENTAL PRINCIPLES OF INSURANCEA contract of insurance must satisfy all the essential requirements of a valid contract as laid down in law of contract. The insurance contract is contract like any other, but with particular peculiar principles. This are summarised as follows:

1. INSURABLE INTERESTIn every contract of insurance, the insured must have insurable interest in the subject mater of insurance. Insurable interest means the legal relations with property insured. It means the financial or monetary interest. It refers to the financial loss or gain the insured has in the existence or non-existence of the subject mater. Thus, a person is not entitled to insure another person’s property or life, unless he has some definite financial stake in the subject matter.In life insurance, insurable interest must exist at the time of making the contract.In fire insurance, it must exist both at time of making contract and time of loss of subject matter.In marine insurance, it must be present at time of loss of the subject matter.The case of Lucena v Craufurd (1806) gives meaning to insurable interest as follows:

A man is interested in a thing to whom advantage may arise or prejudice happen from the circumstances which may attend it

Below are examples of situations which may give rise to insurable interest:a. A creditor has an insurable interest in his debtor to the extent of his debt.b. A partner has an interest in his partners during the subsistence of the partnership.c. An employer has an interest in his employee while in his employment.d. A surety has an interest in the trust estate.e. A husband has an insurable interest in his wife’s life and vice-versa.f. A person has an insurable interest in his own life.

2. UBERRIMAE FIDEIThis phrase means ‘utmost good faith.’ A contact of insurance is one based on utmost good faith, whereby the insured is required to disclose all the relevant material facts to the insurer. This enables the insurer to assess the risk and establishes the premium payable. Failure of utmost good faith will make the whole contract void.

Material facts requiring disclosure are any facts, which influence a prudent insurer to decide whether to, accept the risk and at what rate of premium if he elects to accepts the risk.This concept was explained in Rozanes Vs. Bowen (1928) as follows:

It has been for centuries in England the law in connections with insurance of all sorts, marine fire, life, guarantee and every kind of policy that, as the underwriter knows nothing and the man who comes to him to ask to be insured knows everything, it is the duty of the assured- the man who desires to have a policy, to make a full disclosure to the underwriter without being asked of all the material circumstances, because the underwriter knows nothing and the assured knows everything. This is expressed by saying that it is a contract of utmost good faith ‘Uberrimae fidei’

3. IDEMNITYAll the contract of insurance except life and personal accident insurance are contracts of indemnity i.e. replacement of loss. This means that incase of loss, the insured will be paid the actual amount of loss not exceeding the amount contained in policy. Indemnity is the controlling principle of insurance because purpose of insurance is to replace the loss, as it is not a contract of making profit.

4. SUBROGATIONThis principle is in support of the doctrine of indemnity. It also applies to fire and marine insurance only.

According to the doctrine of subrogation, after the insurer has replaced the loss he steps into the shoes of the insured, and is required to recover any claims the insured may have against any 3rd party. This rule is intended to prevent the insured from receiving double benefit through recovering from the 3rd party, thereby making profit from the unfortunate event.

5. CONTRIBUTIONWhere there are two or more insurers on the same risk and subject matter the doctrine of contribution applies. The purpose of contribution is to distribute the loss on the insurers according to the liability on subject matter.

In case of loss anyone insurer may pay the full amount of loss to the insured. After payment of his amount, the insurer is entitled to claim contribution from the other core insurers. This is therefore an equitable right which enables an insurer who has paid more than his share of liability to recover the excess from the other insurers.

For the right or contribution to be exercisable, the following conditions are necessary:1. There must have been more than one policy on the same subject matter and risk.2. The policies must have been taken out by or on behalf of the same person.3. The policies must have been taken out with different insurers.4. All the policies must have been legally binding agreement.5. All the policies must have been in force when loss occurs.6. None of the policies must have exempted themselves form contribution.

6. CAUSA PROXIMAIt means proximate cause. According to this principle, the inured can recover the loss from insurer only if the loss is caused by proximate cause. Proximate cause refers to the event insured against.

The principle of proximate cause is embodied in the maxim causa proxima non remota spectatur- which means that the proximate cause of an event is the cause to which the event is attributable.

It is the more dominant, direct, operative and efficient cause of the event. It is the cause without which the event would not have occurred. It is a cause which a reasonable person would attribute the event. It is an important weapon in the hands of the insurers by which an insurer can escape liability by demonstrating that the proximate cause was exempted.Hamilton Fraiser Vs. Pandroff (1887)A cargo of rice in a ship was destroyed by sea-water flowing through a hole dug by rats in a bathroom. In the circumstances, the court held that insurer was liable to pay because the damage was due to a risk of sea-water. In this case sea-water was the proximate cause while the rats were the remote cause.

7. MITIGATION OF LOSSIn case the event insured against occurs, the insured must take all the necessary steps to minimize or reduce the loss. He must act as if the subject matter was not insured. If he does not do so, the insurer can avoid payment of loss resulting from negligence from the part of insured.

8. ABANDONMENTThis is the unconditional surrender by the insured to the insurer of the remains of the subject matter for full indemnity. It is the giving up by the insured of the remains for indemnity.

The insured must surrender the subject matter and the document of the title to the insurer. This principle is generally applicable in constructive or total loss e.g. where it is too expensive to retrieve the subject matter or where total loss is inevitable.

Abandonment depends on the insurer.s decision. The insured must notify the insurer on his intention to abandon the subject matter. The notice must be given in accordance with the terms of the polity.

Acceptance of the notice by the insurer is conclusive evidence of sufficiency of the notice and admission of the liability and the insured becomes entitled to full indemnity of the loss.

9. AVERAGE CLAUSEThis is a clause in an insurance policy to the effect that if the subject matter is under insured and partial loss occurs, the insurer is only liable for a fraction of the loss suffered. If the loss is minimal, the insurer’s liability is extinguished.

10. DOUBLE INSURANCEDouble insurance takes place where the same risk and the same subject matter is insured with more than one insurer. It is deferent from over-insurance which occurs where the total amount insured exceeds the value of the subject matter insured.

It is important to note that a contract of insurance is one of indemnity (replacement of loss) hence double or over insurance has no value or advantage to the insured. However, the question of double or over insurance does not arise in the case of life and personal accident insurance because life is priceless.

11. RE-INSURACEReinsurance occurs if an insurer who has already insured specific property insures it with another insurer usually a larger company. This is done in order to spread the risk over a number of insurers. Thus, if an insurance company finds that it has entered into a contract which is a very expensive proposition, it can relieve itself of part or the whole of liability by insuring the subject matter with some other insurers. However, any claim arising under the policy would be paid and thereafter, it would recover the sum from the reinsurance company to the extent of their liability under re-insurance contract. The person originally insured has rights only against the insurer who has insured the policy and not against the company were it is further insured i.e. re-insured. This is due to the privity of contract rule.

Re-insurance meets the following purposes:- It guarantees the meeting of losses if the insurer is not in a position to do so.- It facilitates the spreading of economic benefit from one company to another.- It also ensures that part of the funds polled locally by insurance companies is invested locally.

12. ASSIGNMENTA contract of fire insurance may be assigned only with the consent of insurers. If they refuse to give the consent, no assignment can take place. This was explained in Saddles Company Vs. Badcock (1743) A life policy may be assigned by endorsement on the policy or by a separate instrument. Written notice of the assignment must be given.

13. INSURANCE AGENTSSection 2[1] of the Insurance Act, defines an agent as a person who being a salaried employee of an insurer who in consideration of a commission solicits or procurers insurance business for an insurer or broker.

An insurance agent commits both parties to the transaction. At common law, an insurance agent is the agent of the insured, if the proposer engages him to complete the proposal form. This is justified on the doctrine of non-disclosure which assumes that the proposer is in control of the material facts affecting the subject matter. Consequently any incorrect statements affect the proposer adversely.

However in cases of active fraud, the agent is deemed to be the agent for the insurance company.

Harse Vs Pearl Life Assurance Co. Ltd [1904] 1 KB 558 Held; Where the policy is illegal, the premium cannot be recovered if the insured is in pari delicto (i.e parties are in equal fault) with the insurers. The plaintiff was induced to insure his mother’s life by the insurer’s agent’s innocent misrepresentation that the policy would be a valid one. The policy was illegal under the Life Assurance Act 1774, Sec 1 since the plaintiff had no insurable interest. The plaintiff sought to recover the premium which he had paid. It was held by the Court of Appeal, that the premium was not recoverable because the parties were in pari delicto. Moreover it was found that there was neither mis-statement of fact nor fraud on the part of the agent. That there was no greater impropriety on the part of the agent than there was on the part of the plaintiff.

Under the provision of the Insurance Act 1881 of England, Insurance Agents are deemed to be agents of the Insurer, and in the event of fraud, the insurer is liable. This principle was applied in:O.Conner Vs B.D.B Kirby and Co and Another, [1971] 2 ALL ER 1415. The proposer who owned a motor vehicle took out an insurance policy through the defendant insurance broker. He supplied the necessary information and the broker completed the proposer form. In response to one question, the proposer indicated that he had no garage and that the motor vehicle would be parked by the side of the road. The broker indicated on the proposer form that the motor vehicle would be kept in a garage. The proposer signed the proposer form without detecting the mistake and a policy was subsequently issued. The insured lodged a claim and the mistake was discovered. The insurer repudiated liability whereupon the insured sued the broker in damages for the loss suffered on the ground that the broker had breached his contractual duty to complete the proposal form correctly.Held: The broker was not liable in that, first, it is the duty of the proposer for insurance to make sure that the information contained in the proposal form is accurate and should not or ought not to sign it if it is inaccurate. As it was the insured’s duty to confirm the contents of the form, the effective failure of the loss is his failure to do so.

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

However, under section 81[2] of the Insurance Act, where an agent or servant of an insurer writes or fills in a proposal form for a policy of insurance with an insurer, a policy issued in pursuance of the proposal shall not be avoided by reason only of an incorrect or untrue statement contained in the particulars so written or filled in unless the incorrect or untrue statement was in fact made by the proposer to the agent or servant for the purpose of the proposal and the burden of proving that the statement was so made shall lie upon the insurer.