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DEFINITIONAL PROBLEM
What is insurance? Insurance is a contract

There must be a contractual relationship between insurer and insured.
Premium this 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
Hazard condition that increase or reduce chance of loss arising.

Risk is what insurance addresses.

1. financial risk;
2. Dynamic Risk and Static Risk dynamic risks in the short term are losses but in the long term
they 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. it must 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, the
probability 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 political
phenomena 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 perils
which 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 contract
are 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. 558 insured 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 cost
which 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
14
th
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 16
th
Century 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 cushion
themselves.

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 18
th
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
13
th
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 by
the 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 extending
insurance 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 1
st
1987. 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 be
furnished, 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 of Jupiter
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 a contract 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 as
complete 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)

Page 21 of 52

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. The
cover 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
Page 22 of 52

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
Page 23 of 52


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 as 11.45 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
Page 24 of 52

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
Page 25 of 52

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 AK
Ddamba [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.
Page 26 of 52


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.
Page 27 of 52


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. The
unidentified 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

Page 28 of 52

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.
Page 29 of 52

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 had a 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 classical
definition 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
Page 30 of 52

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 case
of 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.

Page 31 of 52

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
Page 32 of 52

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
Page 33 of 52

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. The
plaintiffs 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
Page 34 of 52

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 his
own 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

Page 35 of 52

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 the
circumstance 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.
Medieval wager 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.

Page 36 of 52

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 alia no insurance shall be made by any person or persons on the life or lives of
any 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
Page 37 of 52

of the mechanics lien. However in Stockdale v Dunlop where 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 in Macaura 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 alia that a creditor had
an insurable interest in the life of a debtor to the extent of the debt. In Hebdon 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. In Harse
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 expenses
but 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 in pari 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 in pari
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 in pari delicto with the defendant whose
agent by false and fraudulent misrepresentation induced him to believe that the transaction was
an innocent one.
Page 38 of 52


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. See Newbury
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 in Dalby 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.

Page 39 of 52

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 in
Carter 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
Page 40 of 52

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 Poland
Prudent insurer
Disclosure
Banque Financiere de la cite SA v Westgate
(1991)

Page 41 of 52

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. In Horne 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. In Associated 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.

Page 42 of 52

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 in Pan 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 payment
of 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.

Page 43 of 52

As enunciated in Carter v Boehn the 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 in Bales 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 within the limits of
the policy and its conditions as far as possible in the same position as he would have occupied
had the event insured against not occurred. It has been observed that a policy of insurance is a
contract of indemnity against loss and to produce gain. The law does not sanction any insurance
which would directly and immediately make the insured party a gainer by the destruction of the
Page 44 of 52

thing destroyed because it otherwise there would be a temptation to destroy the thing insured and
thereby get the money.

Indemnity means that when risk attaches the insurance company is an obligation to put the
insured to the position he was before the loss. It means that there should be no more and no less
than the restitutio in integrum.

In the words of Brett LJ in Castellain v Preston (1883): The foundation in my opinion of every
rule which has been applied to insurance law is this: that the contract of insurance contained in a
marine or fire policy is a contract of indemnity and of indemnity only and that this contract
means that the assured in case of a loss against which the policy has been made shall be fully
indemnified but shall never be more than fully indemnified

This principle ensures that the insured is only restored to the position he was and does not benefit
from the contract. To give effect to indemnity means that when loss occurs or attaches it is duty
of the insurer to ascertain whether there was circumstances which reduce, diminish or extinguish
the insureds loss as they have a similar effect on the amount payable by the insurer.

In the words of Blackburn LJ in Arthur Charles Burnard v Rodocanachi and Sons Ltd (1882) 7
AC 333: The general rule of law is that when there is a contract of indemnity and loss happens
anything which reduces, diminishes or even extinguishes the amount which the indemnified is
bound to pay and if the indemnifier has already paid it than if anything which diminishes the loss
comes into the hands of the person to who he has paid it becomes an equity that the person who
has already the full indemnity is entitled to be recouped by having the amount back.

There are circumstances in which the insured is abound to account for anything over and above
the indemnity. For example, where he receives a gift payment or a payment arising from tortuous
liability.

Gift payments
Page 45 of 52


If a third party makes a voluntary payment to the insured the insurer is not precluded from
claiming the benefit of such payment if its effect is to diminish or extinguished the insureds
loss. However, the purpose of the gift is critical in determining whether the insurer can take
advantage of it. In Castellain v Preston (1881-5) the defendant who owned a house in the city of
Liverpool took out a fire policy on it for 3,100 pounds. Thereafter he entered into a contract to
sell the house. However, before the sale was concluded the house was partially destroyed by fire
and the insurer in ignorance of the fact that there was a contract of sale paid 330 pounds for the
loss. The sale was subsequently completely and Preston received the entire purchase price. The
insurer claimed the 330 pounds on the premise that the contract was one of indemnity and the
insured had suffered no loss. It was held that the insured was bound to account for the sum as he
suffered no loss. In the words of Brett LJ That is a fundamental principle of insurance and if
ever a preposition is brought forward which is at variance with it, that is to say which either will
prevent the assured from obtaining a full indemnity or which will give the assured more than a
full indemnity that proposition must certainly be wrong. Case of Stearns v Village Main Reef
Gold Mining Co Ltd (1905). For the insurer to claim a reimbursement of an account it must be
evident that:
1. he has indemnified the insured in full
2. the gift was paid by the third party for the benefit of all parties
3. the gift had the effect of diminishing or extinguishing the insureds loss. Pandall v Lithgow
(1884)

Payment out of tortuous liability

Yorkshire Insurance Co. Ltd v Nisbett Shipping Co Ltd (1962) 2 QB 330. the insured owned a
vessel Blasirenevis which he issued against loss or damaged by marine risks under a valued
policy for 72,000 pounds. On /February 13 1945 the ship was damaged in a collision with a
Canadian submarine and became a total loss no salvage value on 20 April 1945 the insurer paid
the insurer 72,000 pounds for the loss,. In September 1946 the insured with the insurers
Page 46 of 52

approval commenced proceedings against the Canadian government for loss of the ship and the
Canadian government paid 336,039.53 Canadian dollars. Since the Canadian dollar had been
devalued when converted to pounds the insured realized 55,000 pounds more than the amount
paid by way of indemnity. The insured refunded the insurer 72,000 pounds. The insurer sued the
insured under section 79(1) of the Marine Insurance Act claiming that it was entitled to the
55,000 pounds under subrogative rights. The court held that the insurer was not entitled to the
sum as an insurer cannot recover from the insurer an amount higher than the amount payable by
way of indemnity.

In Darrell v Tibbitts (18879-80) 5 QBD 560, the insured took out a fire policy on his house.
Thereafter the house was destroyed by fire on account of a third partys negligence. The insurer
indemnified the insured for the loss. It was held that the insurer was entitled to recover the
amount paid to the insured as indemnity.

The effect of an indemnity is that the insured must not gain or lose by the attachment of gift. The
principle of indemnity has its justifications in equity. It is argued that in its absence, the insured
would be unjustly enriched. This principle is given effect buy other subordinate principles, for
example, subrogation, salvage, reinstatement, contribution and apportionment, etc. this principle
ensures that the insurer benefits from the contract of insurance. Section 67 (1) of the Marine
Insurance Act embodies this principle

Scottish Union and National Insurance Co. v Davis (1970)
The Italian Express (No 2) (1992) Llyods Rep 281

Subrogation

In the words of Cairns CJ in Simpson v Thompson (1877): Where one person has agreed to
indemnify another he will on making on good the indemnity be entitled to succeed to all the
Page 47 of 52

ways and means by which the person indemnified might have protected himself against or
reimburse himself for the loss.

In contracts of indemnity, by virtue of payment, the insurer becomes entitled to be placed in the
position of the insured and succeeds to all legal and equitable rights in respect of the subject
matter of insurance.

Subrogation literally means putting the insurer into the shoes of the insured after indemnity.

Origins of subrogation

Judicial authority has it that subrogation has its origins and rationalizations at common law and
equity. In Yorkshire Ins. Co v Nisbette Shipping, Lord Diplock referred to referred to subrogation
as a common law principle arising out of a term implied in every contract of indemnity
insurance.

In Napier v Hunter (1993) Lord Templeman observed: The principal which dictated the
decisions of our ancestors and inspired their references to the equitable obligations of an insured
person towards an insurer entitled to subrogation are discernible and immutable. They establish
that such an insurer has an enforceable equitable interest in the damages payable by the
wrongdoer.

However, the application of the principle of subrogation may be modified, extended or excluded
by contract. The extension of subrogative rights by express terms in insurance policy is common.

The principle of subrogation is a latent and inherent characteristic of the contract of indemnity
but does not become operative or enforceable until actual payment is made by the insurer. It
derives its life from the original contract but gains its operative force from payment at the
contract. In the words of Blackburn LJ Burnand v Rodocachi : If the idemnifier has already
Page 48 of 52

paid the insured then anything which diminishes the loss comes into the hands of the person to
whom the idemnifier has paid it. It becomes an equity that the person who has already paid full
indemnity is entitled

Morris v Ford Motor Co. (1973) 1 QB 792
Hobbs v Marloucie (1977) 2All ER 241

To recoup by having the amount paid back. In the words of Brett LJ.in Castellain v
Preston.:The doctrine of subrogation is another proposition which has been introduced in
order to carry out the fundamental rule. It was introduced in favour of underwriters in order to
prevent their having to pay more than a full indemnityIn order to apply the doctrine properly
we must go into the full meaning of subrogation which is the placing of the insurer in the
position of the assured in order fully to carry out the fundamental principles. We must carry the
doctrine so far as to say that between the assured and the insurer, the assurer is entitled to every
right whether on contract to fulfill or unfulfilled or on tort enforced or to any other right legal or
equitable which has accrued to the assured whereby the loss can be or has been diminished. See
Yorkshire Ins Co v Nisbett.

The principle of subrogation is embodied in section 79(1) of the Marine Insurance Act. See
Rehemtulla and Premji v Bishen Singh 14 KLR 91 and John Kakonge v Orienta Fire and
General Ins Co. (1965) EA 137
Scottish Union and National Insurance Co v Davis (1970) 1 LTR. The defendants damaged
motor vehicle was handed over to O Limited for repairs with prior consent of the insurers. O
Ltd made three unsuccessful attempts to repair the motor vehicle. The defendant who was
dissatisfied took the motor vehicle away to another garage for repair. O Ltd sent a bill of 409
pounds to the insurance company who paid the amount without a satisfaction note signed by the
defendant. Subsequently the defendant recovered 350 pounds in settlement of claims with third
parties. The insurer claimed the 350 pounds under the principle of subrogation. However it was
held that the insurer could not recover the amount as it had not indemnified the assured, hence
subrogative rights could not arise. In the words of the Russel J: You can only have a right to
Page 49 of 52

subrogation in a case like this when you have idemnified the person assured and one thing that is
quite plain is that the insurers have never done that

In the case of Page v Scottish Ins. Corporation (1929) LJKB 308, the insurer has an right to
institute legal proceedings in the name of the insured to enforce subrogative rights. See
Mason v Sainsbury (1782) 3 Doug KB 61. However the action remains that of the insured
and the defendant if held liable is only discharged by paying the insured. However in
practice policies permit the insurer to use the insured to sue the insured for failure to avail
his name for use. In such a case the insured is enjoined to the suit as one of the defendants.
Until the insured is indemnified and in the absence of anything to the contrary in the policy he
has the right to sue the wrongdoer and control the proceedings. As a general rule once
subrogative rights exist or potentially exist for the benefit of the insurer the insured must not do
anything likely to prejudice those rights. The wrongdoer cannot by way of defence allege that the
plaintiff is an insurer and that the nominal plaintiff has been fully indemnified. See West of
England Fire Ins Co v Isaacs (1897)1 QB 226.

In addition if an insurer exercising subrogative rights settles the insureds claim against the
wrongdoer and signs a discharge form with reference to all claims arising out of the relevant
events such a discharge is binding. See case of Kitchen Design and Advice Ltd v Lea Valley
Water Co (1989) 2 LLR 333

Subrogative rights are only exercisable in circumstances in which the insured has a right of
action. However, an insurer may voluntarily waive his subrogative rights in certain
circumstances. The waiver may be incorporated in the agreement between the parties if the
insurer realizes a surplus after recovery of the amount paid by way of indemnity the same must
be accounted to the insured. It therefore follows that as a general rule the insurers subrogative
right extend only to the amount paid to the insured. See Nesbitt case.

Subrogation as a principle facilitates indemnity by insuring that the insured does not benefit from
his loss.
Page 50 of 52


Salvage
This is the recovery of by the insurer of the physical remains of the subject matter after
indemnity. It is an integral part of subrogation and characterizes all contracts of indemnity. It is
justified on the premise that the value of the subject matter is included in the amount paid to the
insured by way of indemnity. The legal effect of subrogation of salvage is that there is valid
abandonment by the insured and the insurer is entitled to take over the interests of the insured in
whatever remains of the subject matter.

Reinstatement
This is the repair or replacement of the subject matter in cases of partial loss. As a general rule
indemnity contracts embody an option on the part of the insurer to reinstate the subject matter or
pay indemnity for the loss. The insurer is bound to exercise his option within a reasonable time
of notification of attachment of risk. The subject matter must be capable of being reinstated.
Once the insurer has opted to reinstate he is bound by the choice.

In the case of Sutherland v Sun Fire Office (1852) LR 773 where after investigating a claim the
insurer offered monetary compensation but the insured declined so was the offer to refer the
matter to arbitration whereupon the insurer opted to reinstate but the insured objected. It was
held that the insurer was in the circumstances entitled to reinstate.

Reinstatement must be full and adequate. The subject matter must be reinstated to the
satisfaction of the insured. In Anderson v commercial Union Ins co, (1885) 85 QB 146. The court
observed: We have come to the conclusion that the words reinstatement and replace should thus
apply. If the property is wholly destroyed the company might if they choose instead of paying
the money replace the things by others which are equivalent and if the goods insured are
damaged but not destroyed they may exercise the option to reinstate them, that is repair and put
Page 51 of 52

them in the condition in which they were before. Any loss or liability arising in the course of
reinstatement is borne by the insurer.

In Alchome v Favill (1825) LJ (OS) 47, the insurer opted to reinstate a building but after
reconstruction the building was small than it was before and hence worth less. It was held that
having made the choice to reinstate, the insurer was bound by the choice and was liable to make
good the difference in the value.

The economic effect of reinstatement is to benefit the insurer by ensuring that he does not pay
full indemnity when it is economically cheaper to reinstate.

Contribution and apportionment
Section 32 and 80 of the Marine Insurance

Proximate cause
Causa proxima non remota spectatur
According to Ivamy page 304:Every event is the effect of some cause, it cannot however be
treated as isolated. It is not an effect attributed solely to the operation of the cause working
independently of everything else. It is necessary preceded and led up to by a succession of
events, but for which it would not or might not have happened. Hence it is nothing more than the
last link in a chain of causes and effects, which might be prolonged indefinitely into the past. The
law however refused to enter into a subtle analysis or to carry back the investigation further than
necessary. It looks exclusively to the immediate and proximate cause.

In the words of Lord Bacon in Maxims of Law: It were infinite for the law to consider the
cause or causes and their impulsions one after the other. Therefore it contented itself with the
immediate cause. Therefore I say, according to the true principle of law we must look at only the
Page 52 of 52

immediate and proximate cause of death and it seems to be impracticable to go back ultimately
to the birth of the person for it he had never been borne the accident could not have happened.

The insurer is only liable where the loss or damage is proximately caused by an insured risk. The
principle of proximate cause is common to all branches of insurance and is expressed by the
legal maxim Causa proxima non remota spectatur.

This principle does not mean that the last cause is proximate. It is the cause which is more
effective and dominant. Under section 55 of the Marine Insurance Act, the insurer is only liable
for any loss proximately caused by a peril insured against. Proximate cause means the active
and efficient cause that sets in motion a train of events which brings about a result without the
intervention of any force started and working actively from a new and independent source. This
is the cause which is the more direct, dominant, operative or efficient in giving rise to an event.