INSURANCE

INSURANCE

Contract of Indemnity - Features of Insurance – Fundamental Elements of Insurance – Cover Note – Average Clause in Fire Insurance 

Contract of Indemnity

A contract by which one party promises to save the other from loss caused to him by the conduct of the promisor himself, or by the conduct of any other person, is called a contract of indemnity.

A contract of indemnity is a contingent contract. 

The liability of the indemnifier arises only when the loss is suffered. 

LAW OF INSURANCE

FEATURES

• The main principle of Insurance is the pooling of risks. It spreads the loss over a large number of people who insure themselves against the risk….
• Insurance does not avert or eliminate loss arising from uncertain events.
• It is a cooperative device to spread the loss caused by a risk over a large number of persons who are also exposed to the same risk and insure themselves against that risk.

INSURANCE INVOLVES:

• Contract of Insurance is between the Insurer & Insured for a consideration called the premium.
• The instrument in which the contract of insurance is generally embodied is called the policy. It is evidence of the contract.
• The thing insured is called the subject matter & the interest of the insured in the subject matter is called insurable interest.
• The uncertain events or casualties are called perils insured against.

IS INSURANCE A WAGERING AGREEMENT?

 A contract of Insurance bears a superficial resemblance to a wagering agreement. The difference is that the object of Insurance is to protect the assured against losses whereas the object of the wagering agreement is to earn a speculative gain.

FUNDAMENTAL ELEMENTS

1. The Principle of Utmost Good Faith. (UBERRIMAE FIDEI): The rule caveat emptor,  i.e. let the buyer beware, does not apply. The assured being in the vantage point, since he knows the subject matter, he cannot SUPPRESSIO VERI, i.e. suppress facts or SUGGESTIO FALSI, i.e. make false suggestions or statements.

Glicksman Vs. Lancashire & General Assurance Company, Limited: (1927)

G, along with a partner, was running a tailoring business. He insured the stock-in-trade of the partnership against burglary, with the General Assurance Co. Ltd. A question in the proposal form was: ‘Has any company declined to accept or renew your burglary Insurance?’ G had been declined Insurance cover by another company, but he did not disclose this in the answer to the above question. The response was technically right. He has been declined Insurance, not the partnership. A burglary happened and a large portion of the stock was stolen. The insurance company discovered the non-disclosure by G and refused to pay. The policy document mentioned that a policy obtained through any misrepresentation, suppression, concealment, or untrue averment would be void.

Held: 

• If the proposal mentions that a wrong answer would make the contract void, then beyond doubt, the answer is material to the insurance. The insured cannot raise the contention that the fact is indeed not material.
• It is not enough for the insured to correctly answer the questions in the form. The onus on the insured to disclose facts material to the insurance goes beyond the questions in the proposal form.
• The very inclusion of a question in a proposal form indicates, that the insurer considers it to be material.

Woolcott vs. Sun Alliance & London Insurance Limited: (1978)

Woolcott took insurance against fire with Sun Alliance & London Insurance Limited through his housing society. The house got destroyed by a fire. The Insurance company refused payment on the ground that Woolcott had not disclosed that he had been convicted of robbery & other offences 12 years back. He had not volunteered the information because he had not been asked about it by the building society through which he had taken a loan and the insurance. The court noted from evidence brought before it that Insurance companies would not have extended coverage to a person of this nature as such a contract involved ‘moral hazard’. The court brought out that the insured has to disclose all facts that would be material to a prudent insurer, whether the facts are enquired about or not. 

Joel v. Law Union & Crown Insurance Co.: (1908)

The insurer in a Life Insurance policy did not disclose that she had suffered from mental illness. She was unaware of it as she believed her condition to be depression following an attack of influenza. The court noted: ‘The duty is a duty to disclose, and you cannot disclose, what you do not know.’ The obligation is to disclose what the insurer knows and no obligation about what he ought to have known. 

Note: The requirement of disclosure continues not only till the offer is made, but till the contract is formed. 

P. V. Suresh vs. Insurance Ombudsman, Kerala High Court, 16.02.2012 ( an insurer has to prove fraud to reject a claim)

Lady dies of cervical cancer – insured by husband – she failed to mention Ayurveda treatment for rheumatoid arthritis while buying the policy – claim rejected by Insurance Company – Court upheld the claim - Court held that the insurer must prove the policyholder’s statements were fraudulent and involved suppression of material fact. 

Impact: Insurance company cannot get away by simply listing ‘suppression of fact’ as a reason for rejecting the claim. It has to prove that the information supposedly hidden by the policyholder was material, that is, had a direct bearing to the case and there was an element of fraud involved.

 2. Indemnity: The assured, in case of a loss, shall be paid the actual amount of loss not exceeding the amount of the policy. The object of every contract of insurance is to place the assured in the same financial position, as nearly as possible, after the loss as if the loss had not taken place at all.

NOTE: Life insurance is not a contract of indemnity

Castellain vs. Preston: (1882-83)

A building’s owners entered into a contract to sell land and building. Two weeks later, a part of the building was damaged. The owners received £ 330 from the insurers for the loss. However, they completed the sale and received the full price of the building from the buyer. The insurer demanded the money back, claiming that since the owners had not suffered any loss, they were bound to return the money. 

Note: Under an insurance contract, the liability of the insurer can be to reinstate the property in lieu of paying an amount. Thus, under a contract, an insurer may take up repairs of the property or procure a substitute property for the insured. 

3. Insurable Interest: The assured must be in a legally recognised relationship to what is insured so that he will suffer a direct financial loss on the happening of the event insured. This point distinguishes it from a wagering agreement.

While one cannot define an insurable interest with complete certainty or precision, in general, it exists when the policyholder ‘is so circumstanced with respect to the subject matter of the policy as to have benefited from its existence or prejudiced from its destruction.’

Note: 

• An owner of movable property has an insurable interest in the property. 
• A bailee, hirer, lessee, or mortgagor would also have an insurable interest. 
• In life insurance contracts, blood relatives and relatives by marriage have an insurable interest. 
• An Employer also has an insurable interest in the employee and a creditor in the life of the debtor. 

The insurable interest doctrine asks the following questions: 

• What is the policyholder’s stake in the subject of the property? 
• How attenuated (fine or small) is that interest to the probable cause and effect of loss? 
• How strong is that interest?
• What is the reasonable range of value for the interest? And
• Would permitting the policyholder to recover encourage wagering, fraud, moral hazard, or some other evil?

Macaura v. Northern Assurance Co. Ltd. [1925]

M was the owner of a timber estate. He formed a company, Irish Canadian Saw Mills Ltd., and sold the timber to it for £ 42,000. The purchase consideration was paid to M and his family in the form of shares of the company. M was also an unsecured creditor of the company for £ 19,000. The timber was lying on M’s land.  M insured the timber, but in his own name, and not in the name of the company. The timber was destroyed in a fire. M made a claim on the insurance policy for the value of timber destroyed. The Insurance company argued that M did not have an insurable interest as the timber belonged to the company, not him. In company law, a company is a separate & distinct legal person, separate from the shareholders. 

Held: M’s relation was to the company, not to its goods, and after the fire, he was directly prejudiced by the paucity of the company’s assets, not by the fire. The debt was not exposed to fire nor were the shares. 

4. CAUSA PROXIMA NON-REMOTA SPECTATUR: The assured can recover the loss only if it is proximately caused by any of the perils insured against. If the loss is due to remote causes, the assured will not be indemnified. 

The question, which is the causa proxima of a loss, arises only when there is a succession of causes.

• Proximate cause is the dominant cause - it does not have to be the first.
• Proximate does not mean nearest in time but that which is proximate in efficiency.

The following two cases illustrate whether a remote cause can be considered as the proximate cause of a loss:

In Roth v South Easthope Farmers' Mutual Insurance Co. (1918) lightning damaged a building and weakened a wall.  Shortly afterwards, the weakened wall was blown down by high winds.  Lightning was considered to be the proximate cause.

In Gasgarth v Law Union Insurance Co. (1876) fire damaged a wall and weakened it.  Several days later a gale blew down the weakened wall.  It was held that fire was NOT the proximate cause.

The point to note here between the two cases is the length of time passed before the remote cause occurs, which makes the difference.

Doctrine based on cause and effect

Proximate Cause means:

• Direct cause
• Most dominant cause
• Most effective cause
• Closely connected to loss in efficiency and effectiveness
• Common sense

5. Mitigation of loss: The assured must take all necessary steps or measures as may be reasonable for the purpose of averting or minimising a loss.

6. The risk must attach:  The insurer receives the premium in a contract of insurance for running a certain risk. If for any reason the risk is not run, the consideration for which the premium was given fails. In such an event the insurer must return the premium.

7. Contribution: The right of contribution arises when the subject matter is insured with two or more insurers against the same peril. Either, one insurer meets the loss and claims it from the others, or they meet the loss proportionately.

8. Subrogation: This applies to fire & marine policy i.e. the insurer, after making good the loss, is entitled to be put into the place of the assured. That is to say, the insurer steps into the shoes of the assured when he has paid the amount of the policy to the assured & is entitled to all the rights & remedies that the assured would have had against third persons regarding the loss.

National Employers Mutual General Insurance Association Limited Vs. Jones (1987)

A car belonging to Ms Hopkins was stolen. The insurance company paid for the car. The car became the property of the company and it could recover its price from the person who had bought the car in good faith. 

Holmes Vs. Payne (1930)

For a lost necklace, the insurer agreed that the insured could buy jewellery worth £ 600. After the insured had bought jewellery worth £ 264, the necklace was found. The insurer had become the owner of the necklace and was bound to let the insured buy jewellery for the remaining amount. 

9. The period of Insurance: Fire insurance is from year to year, marine insurance is from year to year or voyage to voyage. Life insurance is a continuing contract if the premium is paid.

POINTS TO PONDER

• An Insurer can reinsure the risk with other insurers. This is termed as reinsurance.
• In Life Insurance, there are three cases in which insurable interest is presumed; own life, life of a spouse, the life of a child. In all other cases, insurable interest has to be proved.
• All LIC policies contain a clause that if the assured commits suicide within one year of the policy being taken, the risk does not attach.
• A Life Insurance Policy can be surrendered before the completion of the period of insurance. A life insurance policy can be assigned Also, based on the surrender value of the policy, the insurer can avail a loan from LIC or from banks by assigning the policy to them. Nomination facilities are also available on life insurance policies. 
• The Fire Insurance policy contains an average clause. (The 'average clause' is defined as a clause in an insurance policy requiring that you bear a proportion of any loss if your assets were insured for less than their full replacement value.)

Cover Note

• It is a document issued by an insurer or underwriter on receiving a proposal pending the execution of the policy. 
• It covers the risk between the date of the contract of insurance and the actual issue of the policy of insurance. 
• It cannot be regarded in law as either an insurance policy or an agreement to issue an insurance policy. 
• But it has been held that if the cover note is properly stamped, a suit for specific performance of the contract can be founded thereon. 
• The liability of the insurer under the cover note ceases when he intimates to the assured the rejection of the proposal.