NATURE OF THE CONTRACT
Insurance is an important part of modern life. Individuals and businesses take out insurance to protect themselves from loss that may occur due to damage to property or loss of life.
What is insurance?
This is a contract whereby a party known as the insurer undertakes, in consideration for a sum of money known as premium paid by the insured, to pay a sum of money or its equivalent on the happening of a specified future event.
The insurance contract is a contract like any other, but with particular peculiar principles. The insurable interest should be beyond the control of either party and there must be an element of negligence or that there is uncertainty. Contracts dealing with uncertain future events are either alieatory, contingent or speculative. In insurance risk exists in priori, whether or not we insure.
However in a wager/stake/ gamble there is no insurable interest.
Parties to the contract
Insurer: This is the person who undertakes to pay the sum assured or indemnity when the insured event occurs. To carry on insurance business in Kenya, a person must be a body corporate (company) licensed by the Commissioner of insurance to do business.
Insured: This is the person who takes out insurance cover, he is the person who pays the premium and may be a natural or artificial person. The insured must have an insurable interest in the subject matter of insurance.
ESSENTIALS OF AN INSURANCE CONTRACT
For a contract of insurance to exist, there must be an agreement under which the insurer is legally bound to compensate the other party or pay the sum assured [premium]. This is the consideration that passes between the parties to support the transaction. It is asserted that premium is the considerations which the insurers receive from the insured in exchange for their undertaking to pay the sum assured in the occurrence of the event insured against. Any consideration sufficient to support a simple contract may constitute a premium in a contract of insurance.
The insurance contract is aleatory, contingent or speculative as it deals with uncertain future events. For an event to be Insurable it must be characterized by some uncertainty.
3. Insurable Interest
The insurable event must be of an adverse nature .i.e. the insured must have an Insurable interest in the property, life or liability which is the subject of the insurance. Insurable interest is said to be the pecuniary or financial interest which is at stake or in danger if the subject matter is not insured. It is a basic requirement for the contract of insurance.
The insurable event must be beyond the control of the party assuring the risk as it was held in
Re Sentinel Securities P.L.L
5. Accidental or Negligent Loss
Insurance can only be effected where 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 for payment of the sum assured. It was so held in Toxleth v Hampton.
Risk has been defined as the chance of loss, the probability of loss or the probability of any outcome different from the one expected. It is a condition in which there is a possibility of an adverse deviation from a desired outcome that is expected or hoped for. For individual proposes, risk is measured by the probability of loss as the individual hopes that it would not occur.
FORMALITIES OF THE CONTRACT
A contract of insurance comes into existence when an offer by the proposer is accepted by the insurer. The proposer makes the offer by completing and submitting to the insurer the proposal form.
This form seeks information in relation to: –
1. Particulars of the proposer
2. Particulars of the subject matter
3. Circumstances affecting the risk and
4. The history of attachment of the risk
The proposer signs a declaration at the bottom of the form to the effect that the answers given constitute the bases of the contract between him and the insurer. The declaration is referred to as “Basis of Contract Clause”. Submission of the proposal form to the insurer constitutes the formal offer by the proposer. The insurer is not bound to accept the offer. However, he may as he assesses the risk, extend temporal cover to the proposer.
Acceptance of the proposal form
The insurer is not bound to accept the proposers offer, however, if the accepted, it signifies a contractual relationship between the two. The insurer may signify acceptance of the proposal form;
1. By formal communication
2. By conduct
3. Issue of the policy
4. Acceptance and retention of premium raises a presumption of acceptance of the proposal form.
Classification of insurance contracts
Insurance contracts may be classified on the basis of:-
1. The event insured: The category of insurance derives its name from the event e.g. fire, burglary, marine, fidelity, motor etc.
2. The Interest Insured: The classification places contracts in 3 categories namely: –
a. Personal Insurance e.g. Life Insurance
b. Property Insurance
c. Liability Insuring e.g. NSSF, NHIF, 3rd Party Motor Insurance
3. Nature of the Contract: –
Indemnity is a contract whereby the insured takes out a policy on the understanding that when loss occurs he will be compensated for the loss. This is property insurance e.g. Fire, burglary, marine.
Non-Indemnity contract is a contract whereby a party known as the insured takes out a policy to secure the payment of a sum of certain in money when risk attaches e.g. life insurance.
4. Whether private or Social: private insurance is optional while voluntary, social or compulsory insurance is a statutory requirement e.g. 3rd party Motor Insurance.
5. Basis of the Programme:
b. Reinsurance: This is a contract in which an insurer insures himself with re-insurer against the risks he has insured against. It may be voluntary or compulsory.
PRINCIPLES OF INSURANCE
1. INSURABLE INTEREST
This is the financial or monetary interest at stake or in danger if the subject matter is not insured. It is the interest a person has in the subject matter which he stands to lose in the event of its loss or destruction.
To ascertain whether a person has insurable interest in subject matter, courts employ the following rules: –
1. There must be a direct relationship between the insured and the subject matter.
2. The insured bears any loss or liability arising
3. The insured must have a legal or equitable interest /right in the subject matter
4. The insured’s interest/right must be capable of financial/pecuniary estimation or qualification.
2. NON-DISCLOSURE / UTMOST GOOD FAITH
The duty to disclose exists throughout the negotiation period. It generally comes to an end when the proposal form is accepted.
Effect of Non-Disclosure
The non-disclosure of a material fact by either partly renders the contract voidable at the option of the innocent party. In London Assurance Company V. Mansel (1879) when responding to a question in the proposal form, the proposer stated that no other insurer had declined to take his risk; in fact 2 companies had previously declined to insure him. Subsequently, the insurer sought to avoid the contract on the ground of non-disclosure of a material fact. It was held that the contract was voidable at the option of the insurer for the concealment of material fact. A similar holding was made in Horne v.Poland (1922)
Although the contract of insurance is one of the utmost good faith certain matters need not be disclosed e.g.:
a) Provisions and propositions of law
b) Unknown facts as was the case in Joel v. Law Union and crown Insurance Company
c) Facts known by other party
d) Matters of public notoriety as was the case in Bates V.Hemitt.
This principle means that when loss occurs, it is the duty of the insurer to restore the insured to the position he was before the loss. The insurer must so far as money can do; put the insured to the position he was before the loss. Idemnity means that there should be no more or no less than restitutio in integrum.
Indemnity is a basic principle in property insurance; it has its justifications in equity in that in its absence the insured is likely to benefit from the contract.
The principle of indemnity is given effect by the subordinate principles e.g: Subrogation, Salvage, re-instatement, contribution and appointment etc.
This means that after the insurer has indemnified the insured, he steps into the shoes of the insured in relation to the subject matter.
It means that after indemnity the insurer becomes entitled to all the legal and equitable rights respect the subject matter previously exercisable by the insured.
Subrogation facilitates indemnity by ensuring that the insured does not benefit from the contract.
This is the recovery by the insurer of the remains of the subject matter after indemnity. It is part of subrogation and facilities indemnity. It is justified on the premise that the amount paid by the insurer as indemnity includes the value of the remains.
This is the repair or replacement of the subject matter in circumstances in which it may be reinstated.
Most indemnity policies confer upon the insurer an option to pay full indemnity or reinstate the subject matter. The insurer must exercise his option within a reasonable time of notification of loss and is bound by his option. If the insurer opts to re-instate, the subject matter must be re-instated to the satisfaction of the insured.
7. DOUBLE INSURANCE
This is a situation whereby a party takes out more than one policy on the same subject matter and risk with different insurers but where the total sum insured exceeds the value of the subject matter.
8. CONTRIBUTION AND APPORTIONMENT
If an insured has taken out more than one policy on the same subject matter and risk with different insurers and loss occurs, the twin principles of contribution and appointment apply: –
a) If the insured claims from all the companies at the same time, they apportion the loss between themselves on the basis of the sums insured. Each insurer bears part of the loss. This is the “Principle of Apportionment”
b) If one of the insurers makes good the total liability to the insured, such insurer is entitled to recover the excess payment from the other insurers. This is the “Principle of Contribution”. This principle is to the effect that an insurer who has paid more that his lawful share of the loss is entitled to receive the excess from the other insurer.
The principle of contribution is equitable. An insurer is only entitled to contribution if the following conditions exist;
1. There must have been more than one policy on the same subject matter and risk.
2. The policies must have been taken out by or on behalf of the same person
3. The policies must have been issued by different insurers
4. The policies must have all been in force when loss occurs
5. All the policies must have been legally binding agreements
6. None of the policies must have exempted itself from contribution.
The twin principles of contribution and apportionment facilitate indemnity.
This is the surrender by the insured of the remains of the subject matter for full indemnity. It entails the giving up the res (residue) to the insurer for indemnity. This principle has its widest application in Marine Insurance but generally applies in case of: –
1. Partial Loss
2. Constructive total loss.
The insured must notify the insurer of his intention to abandon the subject matter. However, it is for the insurer to determine whether or not abandonment is applicable. If the insurer opts to pay full indemnity, it signifies the sufficiency of the insured’s notice and it is an admission of liability.
The insurer becomes entitled to the remains of the subject matter.
10. PROXIMATE CAUSE
An insurer is only liable where loss is proximately caused by an insured risk and not liable where the risk is excepted. The principle of proximate cause protects the insurer from undue liability.
Under this principle, the proximate and not the remote cause is to be looked into. (Causa proxima non remota spectatur)
The proximate cause of an event is the cause to which the event is attributable. It is the cause which is more dominant direct, operative and efficient in giving rise to the event.
Courts have not developed any technical test of ascertaining what the proximate cause of an event is. They rely on common place tests of the reasonable man and that among competing causes, one must be more dominant that the rest. The proximate cause need not be the last on the chain but must be the most operative in occasioning the loss.
TERMINATION OF THE CONTRACT
An insurance contract may come to an end or terminate in any of the following ways:-
1. Payment of Indemnity or the sum assured in the event of total loss. In the case of partial loss, reinstatement does not terminate the policy.
2. Mutual agreement: The parties may at any time agree to terminate the contract at the instance of the insured. In property insurance, the insured becomes entitled to the surrender value of the policy. In life policies, if the insured has been a bona fide insured for 3 years he is entitled to 75% of all premium paid inclusive of any bonuses and interests payable.
3. Breach of condition or warranty: The insurer is entitled to apply for cancellation of the policy if the proposer breached a condition or warranty to procure the policy e.g. Misreprentation or non-disclosure of material facts.
4. Lapse of time: Indemnity contract or property Insurance lapse after one year. It is the duty of the insured to renew cover.
5. Operation of law: These are circumstances which render the maintenance of the policy impossible e.g Winding up or Liquidation of the insurer. 6. Sale of the subject matter