NOTES ON THE LAW OF INSURANCE
Notes on the Law of Insurance
Lecturer: A.Fungo
Definition:
A contract of Insurance is a contract whereby one party undertakes, in return for a consideration paid by the other, to pay a sum of money or provide some equivalent benefit to the other if a specified event should happen or when such an event should happen or to make payments to the other until such an event should happen.
Essence.
The essence of the arrangement being that it is either uncertain whether or uncertain when the event will occur.
The contract is commonly known as a “policy”.
The parties are called respectively “ the insurer or underwriter and the insured or assured or policy holder.
Categories of Insurance contracts:
There are two categories:
1. Indemnity
2. Contingency
In indemnity insurance the undertaking is to provide the insured with an indemnity against a possible future loss or liability e.g. damage to property caused by fire or a motorist liability in tort to a third party who may be injured by his driving.
In contingency insurance the promise is to pay a specified sum on the happening of a named event e.g. a personal injury policy or a life policy. In this case the insurer contracts to pay a predetermined sum when the person whose life is assured dies, and the sum is payable irrespective of the value of the life that is lost.
Another form of contingency insurance is a contract of annuity, where the premium is a lump sum paid in advance and the insurer agrees to make regular periodic payments of a fixed amount until the death of the person concerned.
Note:
It is of the essence of a contract of insurance that the event insured against must be uncertain, either in the sense that it may or may not occur, or that the time of the occurrence is uncertain. Thus a policy of insurance on goods will not normally protect the insured against depreciation or fair wear and tear or loss arising from internal or inherent cause. In addition, the insured is debarred from recovering on insurance in events such as his own fraud or arson, namely the general constraints of public policy.
Case Law
Gray v. Barr [1971] 2QB 554
Bar took a loaded shortgun to Gray’s house to look for his wife, who had been commiting adultery with Gray. During an altercation with Gray the shortgun went off and Gray was killed. His dependents claimed damages from Barr under the Fatal Accidents Act, and Barr sought an indemnity against his insurer under a insurance policy which covered him against his legal liability to pay damages in respect of injuries to third parties caused by accidents.
Held(salmon L.J)
That his conduct amounted to manslaughter and that it would be against a public policy to allow him to claim on the policy.
Similar case
Tinline[1921] 3KB 327 and James [1927] 2KB 311
It was held that persons convicted of manslaughter for reckless, and drunken driving could nevertheless recover indemnity from their insurers.
The case was approved in Marles v Phillip Trant& sons Ltd [1954] LQB 29
However, the liability should be otherwise than on purpose. [Hardy v. Motor Insurer’s Bureau [1964] 2QB 745]
Note: The road traffic cases are sui generis
THE OBJECTIVES AND FUNCTIONS OF INSURANCE
The main objective of insurance is to indemnify i.e. to place a victim in the same position he would have been as if the accident or event did not occur.
The functions of Insurance can be bifurcated into two parts:
1. Primary Functions2. Secondary Functions3. Other Functions
The primary functions of insurance include the following:
Provide Protection - The primary function of insurance is to provide protection against future risk, accidents and uncertainty. Insurance cannot check the happening of the risk, but can certainly provide for the losses of risk. Insurance is actually a protection against economic loss, by sharing the risk with others. Collective bearing of risk - Insurance is a device to share the financial loss of few among many others. Insurance is a mean by which few losses are shared among larger number of people. All the insured contribute the premiums towards a fund and out of which the persons exposed to a particular risk is paid. Assessment of risk - Insurance determines the probable volume of risk by evaluating various factors that give rise to risk. Risk is the basis for determining the premium rate also Provide Certainty - Insurance is a device, which helps to change from uncertainty to certainty. Insurance is device whereby the uncertain risks may be made more certain. The secondary functions of insurance include the following: Prevention of Losses - Insurance cautions individuals and businessmen to adopt suitable device to prevent unfortunate consequences of risk by observing safety instructions; installation of automatic sparkler or alarm systems, etc. Prevention of losses cause lesser payment to the assured by the insurer and this will encourage for more savings by way of premium. Reduced rate of premiums stimulate for more business and better protection to the insured. Small capital to cover larger risks - Insurance relieves the businessmen from security investments, by paying small amount of premium against larger risks and uncertainty. Contributes towards the development of larger industries - Insurance provides development opportunity to those larger industries having more risks in their setting up. Even the financial institutions may be prepared to give credit to sick industrial units which have insured their assets including plant and machinery. The other functions of insurance include the following: Means of savings and investment - Insurance serves as savings and investment, insurance is a compulsory way of savings and it restricts the unnecessary expenses by the insured's For the purpose of availing income-tax exemptions also, people invest in insurance. Source of earning foreign exchange - Insurance is an international business. The country can earn foreign exchange by way of issue of marine insurance policies and various other ways. Risk Free trade - Insurance promotes exports insurance, which makes the foreign trade risk free with the help of different types of policies under marine insurance cover.
SOURCE: http://business.mapsofindia.com/insurance/functions-of-insurance.html
Characteristics of Insurance Contract
The following are the characteristics of insurance contract.
Aleatory
If one party to a contract might receive considerably more in value than he or she gives up under the terms of the agreement, the contract is said to be aleatory. Insurance contracts are of this type because, depending upon chance or any number of uncertain outcomes, the insured (or his or her beneficiaries) may receive substantially more in claim proceeds than was paid to the insurance company in premium dollars. On the other hand, the insurer could ultimately receive significantly more dollars than the insured party if a claim is never filed.
Adhesion
In a contract of adhesion, one party draws up the contract in its entirety and presents it to the other party on a 'take it or leave it' basis; the receiving party does not have the option of negotiating, revising, or deleting any part or provision of the document. Insurance contracts are of this type, because the insurer writes the contract and the insured either 'adheres' to it or is denied coverage. In a court of law, when legal determinations must be made because of ambiguity in a contract of adhesion, the court will render its interpretation against the party that wrote the contract. Typically, the court will grant any reasonable expectation on the part of the insured (or his or her beneficiaries) arising from an insurer-prepared contract.
Utmost Good Faith
Although all contracts ideally should be executed in good faith, insurance contracts are held to an even higher standard, requiring the utmost of this quality between the parties. Due to the nature of an insurance agreement, each party needs – and is legally entitled – to rely upon the representations and declarations of the other. Each party must have a reasonable expectation that the other party is not attempting to defraud, mislead, or conceal information and is indeed conducting themselves in good faith. In a contract of utmost good faith, each party has a duty to reveal all material information (that is, information that would likely influence a party's decision to either enter into or decline the contract), and if any such data is not disclosed, the other party will usually have the right to void the agreement.
Executory
An executory contract is one in which the covenants of one or more parties to the contract remain partially or completely unfulfilled. Insurance contracts necessarily fall under this strict definition; of course, it's stated in the insurance and agreement that the insurer will only perform its obligation after certain events take place (in other words, losses occur).
Unilateral
A contract may either be bilateral or unilateral. In a bilateral contract, each party exchanges a promise for a promise. However, in a unilateral contract, the promise of one party is exchanged for a specific act of the other party. Insurance contracts are unilateral; the insured performs the act of paying the policy premium, and the insurer promises to reimburse the insured for any covered losses that may occur. It must be noted that once the insured has paid the policy premium, nothing else is required on his or her part; no other promises of performance were made. Only the insurer has covenanted any further action, and only the insurer can be held liable for breach of contract.
Conditional
A condition is a provision of a contract which limits the rights provided by the contract. In addition to being executory, aleatory, adhesive, and of the utmost good faith, insurance contracts are also conditional. Even when a loss is suffered, certain conditions must be met before the contract can be legally enforced. For example, the insured individual or beneficiary must satisfy the condition of submitting to the insurance company sufficient proof of loss, or prove that he or she has an insurable interest in the person insured.
There are two basic types of conditions: conditions precedent and conditions subsequent. A condition precedent is any event or act that must take place or be performed before the contractual right will be granted. For instance, before an insured individual can collect medical benefits, he or she must become sick or injured. Further, before a beneficiary will be paid a death benefit, the insured must actually become deceased. A condition subsequent is an event or act that serves to cancel a contractual right. A suicide clause is an example of such a condition. Typical suicide clauses cancel the right of payment of the death benefit if the insured individual takes his or her own life within two years of a life insurance policy's effective date.
Personal contract
Insurance contracts are usually personal agreements between the insurance company and the insured individual, and are not transferable to another person without the insurer's consent. (Life insurance and some maritime insurance policies are notable exceptions to this standard.) As an illustration, if the owner of a car sells the vehicle and no provision is made for the buyer to continue the existing car insurance (which, in actuality, would simply be the writing of the new policy), then coverage will cease with the transfer of title to the new owner.
FORMATION OF THE CONTRACT OF INSURANCE
Pre-contractual Requirements:
A duty to disclose
A contract of insurance is the paradigm case of a contract uberrimae fidei i.e. a contract of utmost good faith.
The insurer is unlikely to know anything about the insured or the nature of the risk for which cover is sought if the insured does not disclose. Accordingly, the insured is required by law to disclose to the insurer in advance of the contract all the material facts known to him. He has also a duty to disclose all the material facts e knows or ought to know in the course of his business.
A fact is material for this purpose if it is one which would influence the judgment of a prudent insurer in deciding whether to undertake the risk and if so, at what premium.
Refer section 10(6) of the Motor vehicle Insurance Act, cap.169
Reference:
London General Omnibus Co.Ltd v. Holloway [1912] 2 KB 72 at 85
Lambert v. Cooperative Insurance Society [1975] 2 Lloyd’s Rep.485
Pan Atlantic Insurance Co.Ltd v. Pine Top Insurance Co.Ltd [1995] 1 AC 501
See also s.17 and 18(1) (2) of the (UK) Marine Insurance Act, 1906.
And if there is a change of cover during the currency of the policy, all relevant facts must again be disclosed.
The Insurer is also under similar obligations. Refer:- Banque Financiere de la Cites SA v. Westgate Insurance Co.Ltd [1991] 2 AC 249(HL)
Glicksman v Lancanshire& General Assurance Co.Ltd [1927] AC 139 (HL)
Tests of Materiality
· The prudent insurer
· The reasonable insured
Examples of Material facts
1. The nature, condition, user and surrounding of the subject matter
2. Risk speculation e.g. overvaluation
3. Temperate and sober habits of the assured
Note: The assured is not supposed to disclose facts which are known to the insurer or which the insurer may reasonably be presumed to know. The insured is excused from disclosing facts which the insurer has actual knowledge.
Duration of the duty to disclose
The insured is bound to disclose all material facts during the negotiations of the contract until it is concluded.
Likewise, where the contract is concluded through an insurance broker or other agent, the agent must disclose to the insurer every material circumstance which is known to himself or has been communicated to him or ought to be known by him, in addition to material circumstances that should be disclosed by the assured.
Effects of non-disclosure:
If any material information is withheld, the contract may be avoided
In the absence of the “basis clause” the insurer cannot repudiate the contract unless he shows that:-
(i) The facts not disclosed were material to the risk
(ii) It was within the knowledge of the insured
(iii) It was not communicated to him
Basis clauses are such statements and answers which are stated to be the basis of the contract.
ISSUES IN RELATION TO A DUTY TO DISCLOSE (UTMOST GOOD FAITH)
Misrepresentation, Conditions, Warranties etc
1. Conditions.
A condition may be defined as a contractual obligation imposed by the insurer on the insured, a breach of which will in the event of loss arising otherwise payable under the policy, entitle the insurer a defence to a claim irrespective whether there is any causal connections between the breach of the contractual obligation and the loss.
What constitutes a condition is a question of construction and not of fact.
There are two types of conditions; viz, implied conditions and express conditions
Examples of implied conditions are:-
· that the parties will observe good faith towards each other at all time and in all material particulars
· that the subject matter of insurance is in existence
· that the insured has an insurable interest etc
A breach of a condition will either render a policy void ab initio or voidable.
2. Warranties
A warranty is a statement that is considered guaranteed to be true and, once declared, becomes an actual part of the contract. Typically, a breach of warranty provides sufficient grounds for the contract to be voided.
See sections 2(1), 54(1) of the Sales of Goods Act, Cap.214 on what is warranty and the effects of breach of a warranty. Also, section 33(1) of the Marine Insurance Act, (UK), 1906.
Note: Warranties must be complied with; the breach of them entitles the insurer to repudiate the contract. There are express and implied warranties.
3. Representation
Conversely, a representation is a statement that is believed to be true to the best of the other party's knowledge. In order to void a contract based on a misrepresentation, a party must prove that the information misrepresented is indeed material to the agreement. According to the laws of most states and in most circumstances, the responses that a person gives on an insurance application are considered to be a representations, and not warranties.
As an example, consider an individual seeking life insurance coverage. He or she would routinely be required to complete an application, on which the applicant's sex and age would be requested. The accuracy of this information is necessary for the insurer to correctly ascertain its risk and determine the policy premium. If the applicant gives these responses incorrectly, they would likely be deemed (in the absence of outright fraud) as misrepresentations, and could possibly be used by the insurance company as grounds for voiding the policy.
There is, however, a difference between the representation (or misrepresentation) of a fact and the expression of an opinion. Take, for instance, a common insurance application question such as, "To the best of your knowledge, do you now believe yourself to be in good health?" An applicant answering 'yes' while knowing that he or she suffers from a particular condition would be guilty of misrepresenting an actual fact. However, if the applicant had no symptoms of any kind that would be recognizable to an average person and no doctor's opinion to the contrary, he or she would simply be stating an opinion and not making a misrepresentation.
Note:-
The representations must be true. If the representation made is not true then it turns out to be a misrepresentation.
4. Misrepresentation
A misrepresentation is a statement, whether written or oral, that is false. Generally speaking, in order for an insurance company to void a contract because of misrepresented information, the information in question must be material to the decision to extend coverage.
5. Concealment
Concealment, on the other hand, is the failure to disclose information that one clearly knows about. To void a contract on the grounds of concealment, the insurer typically must prove that the applicant willfully and intentionally concealed information that was of a material nature.
Where there is a misrepresentation or fraud in the proposal form, the insurer can avoid the policy. But if by inquiry he would have found the truth, he can not avoid the contract (section 19(1) of L.C.A., 1961)
6. Fraud
Fraud is the intentional attempt to persuade, deceive, or trick someone in an effort to gain something of value. Although misrepresentations or concealments may be used to perpetrate fraud, by no means are all misrepresentations and concealments acts of fraud. For instance, if an insurance applicant intentionally lies in order to obtain coverage or make a false claim, it could very well be grounds for the charge of fraud. However, if an applicant misrepresents some piece of information with no intent for gain (such as, for example, failing to disclose a medical treatment that the applicant is personally embarrassed to discuss), then no fraud has occurred.
7. Impersonation (False pretenses)
When one person assumes the identity of another for the purpose of committing a fraud, that person is guilty of the offense of impersonation (also known as false pretenses). For instance, an individual that would likely be turned down for insurance coverage due to questionable health might request a friend to stand in for him (or her) in order to complete a physical examination.
8. Parol (or Oral) evidence rule
This principle limits the effects that oral statements made before a contract's execution can have on the contract. The assumption here is that any oral agreements made before the contract was written were automatically incorporated into the drafting of the contract. Once the contract is executed, any prior oral statements will therefore not be allowed in a court of law to alter or counter the contract
On misrepresentation and its effects refer to sections 17, 18 and 19(1) o te legal effects of fraud, misrepresentation and coercion.
Case
United Bus Service Ltd v. The New India Insurance Co.Ltd [1969] EA 242
The plaintiff had in the proposal form stated that the value of the bus was shs. 65,000/-. A body was built after the proposal was made and raised the value of the bus approximately shs. 100,000/- a fact which was not disclosed to te insurer. After sometime, the bus met an accident and was a partial loss. The insurers repudiated liability on the ground that there was misrepresentation.
It was held that, in accordance with s. 19(1) of the Law of Contract Act, the contract was voidable at the option of the insurers.
TOPIC TWO
THE AGREEMENT OR THE CONTRACT
Offer and acceptance in the contract of Insurance
Definition:-
1. Offer
An offer is a definite proposal or final statement by one party of the terms in which he or she will enter into contract.
It can be made in writing, orally or by conduct. It can be made to specific persons or to the whole world.
In insurance contract, the offer is signified in the proposal form.
A proposal form is a printed form with standard questions to be answered by the person seeking insurance. The answers to the questions are the basis of the decision of the insurer to accept or reject the proposal for insurance.
2. Acceptance
As we know every proposal must be met with an acceptance for there to be a contract.
Acceptance is a final and unqualified expression of assent to the terms of an offer. As a general rule it must be communicated and it may be made in writing, orally or by conduct. Mere silence doesn’t constitute acceptance. See mirror-image rule
Acceptance in insurance contracts is done by filling in the proposal form and returning it to the insurer for consideration.
Note that, rules of contract as to communication of proposal and acceptance do apply here mutatis mutandis.
3. Intention to create Legal Relation
Even in insurance contracts parties must intend to create legal relation. A legal relation can be created by choice of law, jurisdiction, and remedies in case of breach of the contract. This can be seen through a number of documents and clauses signifying the obligations to be bound such as certificates of insurance, broker’s cover notes and letters of insurance as well as clauses stating choice of law, jurisdiction, arbitration etc. There are also documents which ordinarily though lacking legal characteristics are used to acknowledge that the insurance cover has been obtained. These are for instance:-
(a) Arbitration Clause
The arbitration clause is very common in property and liability policies. It is a condition precedent to the right of action against the insurer. It is the clause which allows parties to settle the claim by way of arbitration should any dispute arise between them.
If the insured sues the insurer before reference to the arbitrator where the policy contains the arbitration clause, the insurer can put up the arbitration clause as a defence or they may waive the condition and apply for stay of proceedings pending a reference to arbitration.
Refer: Bhimji Anand Shah v. Hercules Insurance Company Limited [1963] E.A.114 at page 120 and 121.
However, section 124 of the Insurance Act, 1996, provides:
(1) The holder of a policy issued by a Tanzania insurer shall not withstanding any contrary provision i the policy or in any agreement relating to the policy, be entitled to enforce his rights under the policy against the insurer liable under the policy in any court in Tanzania
(2) Notwithstanding the provisions of subsection (1) of this section, a policy issued by a Tanzania insurer may provide that the amount of any liability under a policy shall be determined in accordance with the provisions of the Arbitration Act.
The procedures of arbitration are provided in the Arbitration Act, Cap.15 which is second schedule to the Civil Procedure Code, 1966.
(b) Cover note
A cover note is a document evidencing a temporary insurance contract while the risk is being assessed. Cover notes are issued pending the issue or renewal of a policy. They are issued either by the insurer or their agents on their behalf. A person who is authorised by the insurer to issue cover notes on their behalf is called cover holder. A cover note may even be a letter. Cover notes are exempted from stamp duty but in order that they may be used in court as evidence they must bear a stamp duty.
The duration of the cover note is until the policy has been issued.
During such a period either party can withdraw, that is the insurer has a right to cancel the cover note and the proposer may withdraw his proposal. However, a proportional premium for the period that the insurers were on risk is retainable. Insurers are to be held liable if after termination of the cover note they do not refund the premium they received.
(c) Certificate of Insurance
Is a statement in writing by insurer, concerning a policy of insurance in force or to be issued about some particular matter. By section 7 of the Motor vehicle insurance Act, 1969, the insurer is required to issue a certificate of insurance to the person affecting a policy of insurance. The certificate of insurance is issued at the same time with the cover note. The certificate is subject to the conditions in the policy.
The certificate has two parts: the first part recites the main terms of the cover under which the property is insured, the second part contains the declaration of items to be insured stating the value insured, duration and the marks if any.
(d) Endorsements
An endorsement is a special condition, written or typed on a policy or a printed slip attached, thereto. It is signed and initiated by responsible officer. Section 71(1)(a) of the Insurance Act, 1996 standard endorsements must be furnished to the Commissioner of Insurance.
(e) Memorandum or slip
These sets out the details of the proposed insurable property and the time for which the insurance is to be provided
(f) The Policy of Insurance
A policy of insurance is a document or instrument in which the contract of insurance is contained. It evidences the contract of insurance though it is not the contract itself.
By section 71(1) of the Insurance Act, 1996, life policies must be approved by the Commissioner of Insurance.
By section 38 of the Companies Act, Cap.212 of 2002, a contract may be made by a company, by writing under its common seal, or on behalf of a company or by any person acting under its authority expressly or impliedly, any formalities required by law in the case of contract being made by an individual also apply unless a contrary intention appears to a contract made by or on behalf of a company.
Parts of the Insurance Policy:
(1) The Heading- it contains the name and address of the insurer
(2) The preamble or recital- cites the desire of the insured to propose for insurance. It incorporates statements in the proposal form, representations and warranties.
(3) The operative clause- usually starts with words “Now this policy witnesseth”- it defines the nature and scope of risk insured. It is a legal principle that, any writing coming after the signature of the maker are not part of the instrument signed, if not incorporated in any clause that comes before signature.
(4) The schedule-it indicate various details of the insured matter
(5) Attestation or signature clause- it contains signature and declaration witnessed.
4. Capacity of Parties
Only parties who have the age of majority and who are not disqualified by law can enter into the contract of insurance.
Minors, lunatics, etc can not conclude insurance contracts. All the conditions stipulated in the Law of contract Act and the Age of Majority Act apply even to insurance contracts.
5. Consideration in Insurance contract
The consideration in the contract of insurance is called the “premium”
A premium is a consideration in the contract of insurance, tendered by the insured or his agent to the insurer or their agent for their undertaking to pay the sum insured on the happening of the event insured against.
The premium paid must be equal to the risk run. The amount of premium therefore depends on the amount of the risk. By section 71(1) of the Insurance Act, 1996 every table or statement of the rates of premium which the insurer ordinarily charges must be deposited with the Commissioner of Insurance. And by section 101(1) the insurer is prohibited from making any discrimination in respect of the rate of premiums charged or between life policies which are of the same kind and under which the persons whose lives are insured have equal life expectancy.
The premium must be paid by the insured, his agent or any other person at the direction of the insured. The premium is usually aid in money form unless otherwise expressed.
By s. 135 of the insurance Act, 1996 an employer who fails or delays to remit premiums, deducted from the salaries of his employees commits an offence and is liable to pay double amount delayed or six months jail or both punishments.
On payment of premium the postal rule apply if the insured was expressly authorised to pay premium through the post office.
Effects of premium
In the absence of any term to the contrary, one a premium is paid, the contract is concluded
Return of premium.
There is a return of premium in the following circumstances:-
(a) Where the parties were never ad idem
(b) If the insurers who issued the policy acted ultra vires
(c) Where the policy is illegal
(d) Where there has been fraud or breach of duty of good faith on the part of insurers
(e) If at the time of commencing the risk, the subject matter does not exist
(f) Where the subject matter is not capable of identification
(g) Where the insured has no insurable interest in the subject matter of insurance
No return of premium
1. Where there is no failure of consideration i.e the risk has attached
2. Where the failure of consideration is attributable to the insured
3. If there is a forfeiture clause
Assignment in Insurance Contracts
The contract of Insurance can be assigned. Thus both the subject matter of insurance (except life and personal accident) and the policy of Insurance can be assigned.
An assignment is a transfer of property, some interest in the property or a chose in action by one person to another person. The person who transfers such property, interest or chose in action is called an assignor.
The person to whom such property, interest or chose in action is transferred is called an assignee
How to effect a transfer
The transfer may be by deed or if a movable property is concerned by actual handing over of the assigned property.
Types of Assignment
(a) Legal assignment
(b) Equitable assignment
Where there is a deed for assignment, it is said that there is a legal assignment.
Where assignment is other than by deed it is called equitable assignment.
Reference:-
Section 136 of the UK, Law of Property Act, 1925
For a legal assignment to take place the following must be fulfilled:-
(a) The assignment should be in writing
(b) It must be an assignment of the whole debt or policy
(c) It must be an absolute assignment
(d) Notice of assignment should be given to the debtor or insurer
The assignment of the subject matter
Normally insurance contracts contain clauses restricting assignment. However, where there is operation of the law e.g in case of bankruptcy or death of the insured the subject matter passes to the legal representatives or trustees in bankruptcy.
It should however, be noted that, the assignment of the subject matter of insurance does not automatically transfer the interest in the policy of insurance.
Assignment by operation of the law
Assignment by operation of the law takes place on the death or bankruptcy of the insured. Upon the death of the insured, the subject matter of insurance passes to the name of the personal legal representative of the insured. The policy is valid.
The personal legal representative must produce the insured’s death certificate; probate or letters of administration. A probate is necessary where the deceased insured has left a will while letters of administration are necessary where the deceased died without a will and the person who holds letters of administration is called an administrator. The person who holds the probate is called an executor.
When the insured becomes bankrupt, his property passes to the trustee in bankruptcy for the benefit of his insured creditors.
Refer a case of Roger Lynch v Robert Daizel (1720) 4Bro. Parl. Case 431.H.L. at page 105 of Mwakajinga’s book.
The creation of Trust or Mortgage
Trust
A trust is said to be created where one person transfers his property or interest to another person for the benefit of a third party or himself.
The person who transfers the property is called a testator and the person to whom the property is transferred is called cestui qui trust or beneficiary.
The property so transferred is called a trust property.
Where the transfer of such property is without consideration and does not divest the insured of his interest, the policy is valid i.e. should a claim arise, the insured will be indemnified.
Mortgage
A mortgage is the transfer of property called mortgage property from one person to another in consideration of money advanced from mortgagee to the mortgagor.
The transferor of the mortgage property is called the mortgagor; whereas the transferee of the mortgage property is called the mortgagee. The transfer of property in the mortgage is not complete because the mortgagor has a right of redemption. Such right is called the equitable right of redemption. See section 57 of the Land Registration Act, Cap.334 and section 2 of the Land Act, No.5 of 1999. A mortgage is also an interest in the right of occupancy or lease securing the payment of money or money’s worth or the fulfilment of a condition and includes a sub-mortgage and the instrument creating a mortgage.
What constitutes a valid assignment?
In order to constitute a valid assignment, there must be consent of the insurer and contemporarily of assignment of the policy and the subject matter.
Contemporaneity of assignment
For an assignee to be indemnified, the assignment of the policy must be accompanied with a transfer of interest in the subject matter of insurance. The assignment of the insurance policy without the assignment of the interest in the subject matter is invalid. See section 51 of the Marine Insurance Act, 1906.
The Notice
The notice of assignment must be given to the insurer. See section 3 of the Policies of Insurance Act, 1867(UK).Also, under section 33(2) of the Merchant Shipping Act, 1967 mortgaging of a ship or a share shall be entered into the register book. Under section 60(1) of the Land registration Act, cap.334 and section 116(1) of the Land Act, 1999- mortgages shall rank according to the order in which they are registered.
The importance of notice of assignment is in settling claims. Claims are settled according to the notice which is called priority of notice. See section 3 of the (UK) Policies of Assurance Act, 1867.
The effect of assignment of the Policy
The assignment of the policy of insurance entitles the assignee every right in the policy as an insured. He has to observe the conditions in the insurance policy. The assignee in his name may enforce the rights in the insurance policy. See section 50(2) of the UK Marine Insurance Act, 1906.
The discharge of the Contract of Insurance
The contract of insurance may be discharged in the following ways:-
(a) By performance
(b) By breach
(c) By agreement
(d) By frustration
(e) By novation
The effect of discharge is to release parties from their obligations. Their relationship under the contract ceases and determines.
(a) The discharge by performance
After performance to the satisfaction of either party, the contract comes to an end. Discharge by performance is also when the terms of insurance expires
(b) The discharge by breach
There is a discharge by breach where a party to it breaks an obligation imposed by the contract. The other party has a right to claim for damages.
(c) The discharge by agreement
The parties may agree to come to an end with their contract. Under the insurance contract, the contract may be cancelled by either party upon serving notice within a prescribed period to the other party. The parties therefore are discharged from their contractual obligations.
(d) Novation
This is where parties agree to substitute a new contract or the old one. In this the parties are discharged from performing their obligation under an old contract. However, they are bound by the terms of the new contract.
(e) By frustration
A contract is said to be discharged by frustration where the performance of it is rendered impossible by the external forces beyond the control of the parties to the contract. Thus a contract will be discharged by frustration where there is for instance death or insanity of one of the parties to the contract, unless the contract can be performed by representatives. If there is liquidation of the company or operation of the law, e.g. operation of the new legislation which bars the continuance of the contract
TOPIC FOUR
Void and Illegal Insurance Contracts
Wagering contracts are illegal while insurance contracts are legal. See section 30 of the Law of contract Act, cap.433 of 1961.
A wagering contract or gaming is a promise to give money or money’s worth upon a happening of or non happening of a certain event. E.g. betting
Wagering contracts are very similar to insurance contracts, but their main differences are the following:-
In wagering contract the risk is voluntarily assumed while in insurance contracts the risk is not voluntarily assumed but uncertain
There is no insurable interest in wagering contracts while there must be an insurable interest in the contract of insurance for one to be paid
There is no loss, damage or liability in the wagering contract’s event while there must be loss, damage or liability in insurance contract to which the insurance intends to mitigate
There is no indemnity after adventure in wagering contracts, it is pure for profit making whereas the insured is indemnified in insurance contract after adventure.
Lecturer: A.Fungo
Definition:
A contract of Insurance is a contract whereby one party undertakes, in return for a consideration paid by the other, to pay a sum of money or provide some equivalent benefit to the other if a specified event should happen or when such an event should happen or to make payments to the other until such an event should happen.
Essence.
The essence of the arrangement being that it is either uncertain whether or uncertain when the event will occur.
The contract is commonly known as a “policy”.
The parties are called respectively “ the insurer or underwriter and the insured or assured or policy holder.
Categories of Insurance contracts:
There are two categories:
1. Indemnity
2. Contingency
In indemnity insurance the undertaking is to provide the insured with an indemnity against a possible future loss or liability e.g. damage to property caused by fire or a motorist liability in tort to a third party who may be injured by his driving.
In contingency insurance the promise is to pay a specified sum on the happening of a named event e.g. a personal injury policy or a life policy. In this case the insurer contracts to pay a predetermined sum when the person whose life is assured dies, and the sum is payable irrespective of the value of the life that is lost.
Another form of contingency insurance is a contract of annuity, where the premium is a lump sum paid in advance and the insurer agrees to make regular periodic payments of a fixed amount until the death of the person concerned.
Note:
It is of the essence of a contract of insurance that the event insured against must be uncertain, either in the sense that it may or may not occur, or that the time of the occurrence is uncertain. Thus a policy of insurance on goods will not normally protect the insured against depreciation or fair wear and tear or loss arising from internal or inherent cause. In addition, the insured is debarred from recovering on insurance in events such as his own fraud or arson, namely the general constraints of public policy.
Case Law
Gray v. Barr [1971] 2QB 554
Bar took a loaded shortgun to Gray’s house to look for his wife, who had been commiting adultery with Gray. During an altercation with Gray the shortgun went off and Gray was killed. His dependents claimed damages from Barr under the Fatal Accidents Act, and Barr sought an indemnity against his insurer under a insurance policy which covered him against his legal liability to pay damages in respect of injuries to third parties caused by accidents.
Held(salmon L.J)
That his conduct amounted to manslaughter and that it would be against a public policy to allow him to claim on the policy.
Similar case
Tinline[1921] 3KB 327 and James [1927] 2KB 311
It was held that persons convicted of manslaughter for reckless, and drunken driving could nevertheless recover indemnity from their insurers.
The case was approved in Marles v Phillip Trant& sons Ltd [1954] LQB 29
However, the liability should be otherwise than on purpose. [Hardy v. Motor Insurer’s Bureau [1964] 2QB 745]
Note: The road traffic cases are sui generis
THE OBJECTIVES AND FUNCTIONS OF INSURANCE
The main objective of insurance is to indemnify i.e. to place a victim in the same position he would have been as if the accident or event did not occur.
The functions of Insurance can be bifurcated into two parts:
1. Primary Functions2. Secondary Functions3. Other Functions
The primary functions of insurance include the following:
Provide Protection - The primary function of insurance is to provide protection against future risk, accidents and uncertainty. Insurance cannot check the happening of the risk, but can certainly provide for the losses of risk. Insurance is actually a protection against economic loss, by sharing the risk with others. Collective bearing of risk - Insurance is a device to share the financial loss of few among many others. Insurance is a mean by which few losses are shared among larger number of people. All the insured contribute the premiums towards a fund and out of which the persons exposed to a particular risk is paid. Assessment of risk - Insurance determines the probable volume of risk by evaluating various factors that give rise to risk. Risk is the basis for determining the premium rate also Provide Certainty - Insurance is a device, which helps to change from uncertainty to certainty. Insurance is device whereby the uncertain risks may be made more certain. The secondary functions of insurance include the following: Prevention of Losses - Insurance cautions individuals and businessmen to adopt suitable device to prevent unfortunate consequences of risk by observing safety instructions; installation of automatic sparkler or alarm systems, etc. Prevention of losses cause lesser payment to the assured by the insurer and this will encourage for more savings by way of premium. Reduced rate of premiums stimulate for more business and better protection to the insured. Small capital to cover larger risks - Insurance relieves the businessmen from security investments, by paying small amount of premium against larger risks and uncertainty. Contributes towards the development of larger industries - Insurance provides development opportunity to those larger industries having more risks in their setting up. Even the financial institutions may be prepared to give credit to sick industrial units which have insured their assets including plant and machinery. The other functions of insurance include the following: Means of savings and investment - Insurance serves as savings and investment, insurance is a compulsory way of savings and it restricts the unnecessary expenses by the insured's For the purpose of availing income-tax exemptions also, people invest in insurance. Source of earning foreign exchange - Insurance is an international business. The country can earn foreign exchange by way of issue of marine insurance policies and various other ways. Risk Free trade - Insurance promotes exports insurance, which makes the foreign trade risk free with the help of different types of policies under marine insurance cover.
SOURCE: http://business.mapsofindia.com/insurance/functions-of-insurance.html
Characteristics of Insurance Contract
The following are the characteristics of insurance contract.
Aleatory
If one party to a contract might receive considerably more in value than he or she gives up under the terms of the agreement, the contract is said to be aleatory. Insurance contracts are of this type because, depending upon chance or any number of uncertain outcomes, the insured (or his or her beneficiaries) may receive substantially more in claim proceeds than was paid to the insurance company in premium dollars. On the other hand, the insurer could ultimately receive significantly more dollars than the insured party if a claim is never filed.
Adhesion
In a contract of adhesion, one party draws up the contract in its entirety and presents it to the other party on a 'take it or leave it' basis; the receiving party does not have the option of negotiating, revising, or deleting any part or provision of the document. Insurance contracts are of this type, because the insurer writes the contract and the insured either 'adheres' to it or is denied coverage. In a court of law, when legal determinations must be made because of ambiguity in a contract of adhesion, the court will render its interpretation against the party that wrote the contract. Typically, the court will grant any reasonable expectation on the part of the insured (or his or her beneficiaries) arising from an insurer-prepared contract.
Utmost Good Faith
Although all contracts ideally should be executed in good faith, insurance contracts are held to an even higher standard, requiring the utmost of this quality between the parties. Due to the nature of an insurance agreement, each party needs – and is legally entitled – to rely upon the representations and declarations of the other. Each party must have a reasonable expectation that the other party is not attempting to defraud, mislead, or conceal information and is indeed conducting themselves in good faith. In a contract of utmost good faith, each party has a duty to reveal all material information (that is, information that would likely influence a party's decision to either enter into or decline the contract), and if any such data is not disclosed, the other party will usually have the right to void the agreement.
Executory
An executory contract is one in which the covenants of one or more parties to the contract remain partially or completely unfulfilled. Insurance contracts necessarily fall under this strict definition; of course, it's stated in the insurance and agreement that the insurer will only perform its obligation after certain events take place (in other words, losses occur).
Unilateral
A contract may either be bilateral or unilateral. In a bilateral contract, each party exchanges a promise for a promise. However, in a unilateral contract, the promise of one party is exchanged for a specific act of the other party. Insurance contracts are unilateral; the insured performs the act of paying the policy premium, and the insurer promises to reimburse the insured for any covered losses that may occur. It must be noted that once the insured has paid the policy premium, nothing else is required on his or her part; no other promises of performance were made. Only the insurer has covenanted any further action, and only the insurer can be held liable for breach of contract.
Conditional
A condition is a provision of a contract which limits the rights provided by the contract. In addition to being executory, aleatory, adhesive, and of the utmost good faith, insurance contracts are also conditional. Even when a loss is suffered, certain conditions must be met before the contract can be legally enforced. For example, the insured individual or beneficiary must satisfy the condition of submitting to the insurance company sufficient proof of loss, or prove that he or she has an insurable interest in the person insured.
There are two basic types of conditions: conditions precedent and conditions subsequent. A condition precedent is any event or act that must take place or be performed before the contractual right will be granted. For instance, before an insured individual can collect medical benefits, he or she must become sick or injured. Further, before a beneficiary will be paid a death benefit, the insured must actually become deceased. A condition subsequent is an event or act that serves to cancel a contractual right. A suicide clause is an example of such a condition. Typical suicide clauses cancel the right of payment of the death benefit if the insured individual takes his or her own life within two years of a life insurance policy's effective date.
Personal contract
Insurance contracts are usually personal agreements between the insurance company and the insured individual, and are not transferable to another person without the insurer's consent. (Life insurance and some maritime insurance policies are notable exceptions to this standard.) As an illustration, if the owner of a car sells the vehicle and no provision is made for the buyer to continue the existing car insurance (which, in actuality, would simply be the writing of the new policy), then coverage will cease with the transfer of title to the new owner.
FORMATION OF THE CONTRACT OF INSURANCE
Pre-contractual Requirements:
A duty to disclose
A contract of insurance is the paradigm case of a contract uberrimae fidei i.e. a contract of utmost good faith.
The insurer is unlikely to know anything about the insured or the nature of the risk for which cover is sought if the insured does not disclose. Accordingly, the insured is required by law to disclose to the insurer in advance of the contract all the material facts known to him. He has also a duty to disclose all the material facts e knows or ought to know in the course of his business.
A fact is material for this purpose if it is one which would influence the judgment of a prudent insurer in deciding whether to undertake the risk and if so, at what premium.
Refer section 10(6) of the Motor vehicle Insurance Act, cap.169
Reference:
London General Omnibus Co.Ltd v. Holloway [1912] 2 KB 72 at 85
Lambert v. Cooperative Insurance Society [1975] 2 Lloyd’s Rep.485
Pan Atlantic Insurance Co.Ltd v. Pine Top Insurance Co.Ltd [1995] 1 AC 501
See also s.17 and 18(1) (2) of the (UK) Marine Insurance Act, 1906.
And if there is a change of cover during the currency of the policy, all relevant facts must again be disclosed.
The Insurer is also under similar obligations. Refer:- Banque Financiere de la Cites SA v. Westgate Insurance Co.Ltd [1991] 2 AC 249(HL)
Glicksman v Lancanshire& General Assurance Co.Ltd [1927] AC 139 (HL)
Tests of Materiality
· The prudent insurer
· The reasonable insured
Examples of Material facts
1. The nature, condition, user and surrounding of the subject matter
2. Risk speculation e.g. overvaluation
3. Temperate and sober habits of the assured
Note: The assured is not supposed to disclose facts which are known to the insurer or which the insurer may reasonably be presumed to know. The insured is excused from disclosing facts which the insurer has actual knowledge.
Duration of the duty to disclose
The insured is bound to disclose all material facts during the negotiations of the contract until it is concluded.
Likewise, where the contract is concluded through an insurance broker or other agent, the agent must disclose to the insurer every material circumstance which is known to himself or has been communicated to him or ought to be known by him, in addition to material circumstances that should be disclosed by the assured.
Effects of non-disclosure:
If any material information is withheld, the contract may be avoided
In the absence of the “basis clause” the insurer cannot repudiate the contract unless he shows that:-
(i) The facts not disclosed were material to the risk
(ii) It was within the knowledge of the insured
(iii) It was not communicated to him
Basis clauses are such statements and answers which are stated to be the basis of the contract.
ISSUES IN RELATION TO A DUTY TO DISCLOSE (UTMOST GOOD FAITH)
Misrepresentation, Conditions, Warranties etc
1. Conditions.
A condition may be defined as a contractual obligation imposed by the insurer on the insured, a breach of which will in the event of loss arising otherwise payable under the policy, entitle the insurer a defence to a claim irrespective whether there is any causal connections between the breach of the contractual obligation and the loss.
What constitutes a condition is a question of construction and not of fact.
There are two types of conditions; viz, implied conditions and express conditions
Examples of implied conditions are:-
· that the parties will observe good faith towards each other at all time and in all material particulars
· that the subject matter of insurance is in existence
· that the insured has an insurable interest etc
A breach of a condition will either render a policy void ab initio or voidable.
2. Warranties
A warranty is a statement that is considered guaranteed to be true and, once declared, becomes an actual part of the contract. Typically, a breach of warranty provides sufficient grounds for the contract to be voided.
See sections 2(1), 54(1) of the Sales of Goods Act, Cap.214 on what is warranty and the effects of breach of a warranty. Also, section 33(1) of the Marine Insurance Act, (UK), 1906.
Note: Warranties must be complied with; the breach of them entitles the insurer to repudiate the contract. There are express and implied warranties.
3. Representation
Conversely, a representation is a statement that is believed to be true to the best of the other party's knowledge. In order to void a contract based on a misrepresentation, a party must prove that the information misrepresented is indeed material to the agreement. According to the laws of most states and in most circumstances, the responses that a person gives on an insurance application are considered to be a representations, and not warranties.
As an example, consider an individual seeking life insurance coverage. He or she would routinely be required to complete an application, on which the applicant's sex and age would be requested. The accuracy of this information is necessary for the insurer to correctly ascertain its risk and determine the policy premium. If the applicant gives these responses incorrectly, they would likely be deemed (in the absence of outright fraud) as misrepresentations, and could possibly be used by the insurance company as grounds for voiding the policy.
There is, however, a difference between the representation (or misrepresentation) of a fact and the expression of an opinion. Take, for instance, a common insurance application question such as, "To the best of your knowledge, do you now believe yourself to be in good health?" An applicant answering 'yes' while knowing that he or she suffers from a particular condition would be guilty of misrepresenting an actual fact. However, if the applicant had no symptoms of any kind that would be recognizable to an average person and no doctor's opinion to the contrary, he or she would simply be stating an opinion and not making a misrepresentation.
Note:-
The representations must be true. If the representation made is not true then it turns out to be a misrepresentation.
4. Misrepresentation
A misrepresentation is a statement, whether written or oral, that is false. Generally speaking, in order for an insurance company to void a contract because of misrepresented information, the information in question must be material to the decision to extend coverage.
5. Concealment
Concealment, on the other hand, is the failure to disclose information that one clearly knows about. To void a contract on the grounds of concealment, the insurer typically must prove that the applicant willfully and intentionally concealed information that was of a material nature.
Where there is a misrepresentation or fraud in the proposal form, the insurer can avoid the policy. But if by inquiry he would have found the truth, he can not avoid the contract (section 19(1) of L.C.A., 1961)
6. Fraud
Fraud is the intentional attempt to persuade, deceive, or trick someone in an effort to gain something of value. Although misrepresentations or concealments may be used to perpetrate fraud, by no means are all misrepresentations and concealments acts of fraud. For instance, if an insurance applicant intentionally lies in order to obtain coverage or make a false claim, it could very well be grounds for the charge of fraud. However, if an applicant misrepresents some piece of information with no intent for gain (such as, for example, failing to disclose a medical treatment that the applicant is personally embarrassed to discuss), then no fraud has occurred.
7. Impersonation (False pretenses)
When one person assumes the identity of another for the purpose of committing a fraud, that person is guilty of the offense of impersonation (also known as false pretenses). For instance, an individual that would likely be turned down for insurance coverage due to questionable health might request a friend to stand in for him (or her) in order to complete a physical examination.
8. Parol (or Oral) evidence rule
This principle limits the effects that oral statements made before a contract's execution can have on the contract. The assumption here is that any oral agreements made before the contract was written were automatically incorporated into the drafting of the contract. Once the contract is executed, any prior oral statements will therefore not be allowed in a court of law to alter or counter the contract
On misrepresentation and its effects refer to sections 17, 18 and 19(1) o te legal effects of fraud, misrepresentation and coercion.
Case
United Bus Service Ltd v. The New India Insurance Co.Ltd [1969] EA 242
The plaintiff had in the proposal form stated that the value of the bus was shs. 65,000/-. A body was built after the proposal was made and raised the value of the bus approximately shs. 100,000/- a fact which was not disclosed to te insurer. After sometime, the bus met an accident and was a partial loss. The insurers repudiated liability on the ground that there was misrepresentation.
It was held that, in accordance with s. 19(1) of the Law of Contract Act, the contract was voidable at the option of the insurers.
TOPIC TWO
THE AGREEMENT OR THE CONTRACT
Offer and acceptance in the contract of Insurance
Definition:-
1. Offer
An offer is a definite proposal or final statement by one party of the terms in which he or she will enter into contract.
It can be made in writing, orally or by conduct. It can be made to specific persons or to the whole world.
In insurance contract, the offer is signified in the proposal form.
A proposal form is a printed form with standard questions to be answered by the person seeking insurance. The answers to the questions are the basis of the decision of the insurer to accept or reject the proposal for insurance.
2. Acceptance
As we know every proposal must be met with an acceptance for there to be a contract.
Acceptance is a final and unqualified expression of assent to the terms of an offer. As a general rule it must be communicated and it may be made in writing, orally or by conduct. Mere silence doesn’t constitute acceptance. See mirror-image rule
Acceptance in insurance contracts is done by filling in the proposal form and returning it to the insurer for consideration.
Note that, rules of contract as to communication of proposal and acceptance do apply here mutatis mutandis.
3. Intention to create Legal Relation
Even in insurance contracts parties must intend to create legal relation. A legal relation can be created by choice of law, jurisdiction, and remedies in case of breach of the contract. This can be seen through a number of documents and clauses signifying the obligations to be bound such as certificates of insurance, broker’s cover notes and letters of insurance as well as clauses stating choice of law, jurisdiction, arbitration etc. There are also documents which ordinarily though lacking legal characteristics are used to acknowledge that the insurance cover has been obtained. These are for instance:-
(a) Arbitration Clause
The arbitration clause is very common in property and liability policies. It is a condition precedent to the right of action against the insurer. It is the clause which allows parties to settle the claim by way of arbitration should any dispute arise between them.
If the insured sues the insurer before reference to the arbitrator where the policy contains the arbitration clause, the insurer can put up the arbitration clause as a defence or they may waive the condition and apply for stay of proceedings pending a reference to arbitration.
Refer: Bhimji Anand Shah v. Hercules Insurance Company Limited [1963] E.A.114 at page 120 and 121.
However, section 124 of the Insurance Act, 1996, provides:
(1) The holder of a policy issued by a Tanzania insurer shall not withstanding any contrary provision i the policy or in any agreement relating to the policy, be entitled to enforce his rights under the policy against the insurer liable under the policy in any court in Tanzania
(2) Notwithstanding the provisions of subsection (1) of this section, a policy issued by a Tanzania insurer may provide that the amount of any liability under a policy shall be determined in accordance with the provisions of the Arbitration Act.
The procedures of arbitration are provided in the Arbitration Act, Cap.15 which is second schedule to the Civil Procedure Code, 1966.
(b) Cover note
A cover note is a document evidencing a temporary insurance contract while the risk is being assessed. Cover notes are issued pending the issue or renewal of a policy. They are issued either by the insurer or their agents on their behalf. A person who is authorised by the insurer to issue cover notes on their behalf is called cover holder. A cover note may even be a letter. Cover notes are exempted from stamp duty but in order that they may be used in court as evidence they must bear a stamp duty.
The duration of the cover note is until the policy has been issued.
During such a period either party can withdraw, that is the insurer has a right to cancel the cover note and the proposer may withdraw his proposal. However, a proportional premium for the period that the insurers were on risk is retainable. Insurers are to be held liable if after termination of the cover note they do not refund the premium they received.
(c) Certificate of Insurance
Is a statement in writing by insurer, concerning a policy of insurance in force or to be issued about some particular matter. By section 7 of the Motor vehicle insurance Act, 1969, the insurer is required to issue a certificate of insurance to the person affecting a policy of insurance. The certificate of insurance is issued at the same time with the cover note. The certificate is subject to the conditions in the policy.
The certificate has two parts: the first part recites the main terms of the cover under which the property is insured, the second part contains the declaration of items to be insured stating the value insured, duration and the marks if any.
(d) Endorsements
An endorsement is a special condition, written or typed on a policy or a printed slip attached, thereto. It is signed and initiated by responsible officer. Section 71(1)(a) of the Insurance Act, 1996 standard endorsements must be furnished to the Commissioner of Insurance.
(e) Memorandum or slip
These sets out the details of the proposed insurable property and the time for which the insurance is to be provided
(f) The Policy of Insurance
A policy of insurance is a document or instrument in which the contract of insurance is contained. It evidences the contract of insurance though it is not the contract itself.
By section 71(1) of the Insurance Act, 1996, life policies must be approved by the Commissioner of Insurance.
By section 38 of the Companies Act, Cap.212 of 2002, a contract may be made by a company, by writing under its common seal, or on behalf of a company or by any person acting under its authority expressly or impliedly, any formalities required by law in the case of contract being made by an individual also apply unless a contrary intention appears to a contract made by or on behalf of a company.
Parts of the Insurance Policy:
(1) The Heading- it contains the name and address of the insurer
(2) The preamble or recital- cites the desire of the insured to propose for insurance. It incorporates statements in the proposal form, representations and warranties.
(3) The operative clause- usually starts with words “Now this policy witnesseth”- it defines the nature and scope of risk insured. It is a legal principle that, any writing coming after the signature of the maker are not part of the instrument signed, if not incorporated in any clause that comes before signature.
(4) The schedule-it indicate various details of the insured matter
(5) Attestation or signature clause- it contains signature and declaration witnessed.
4. Capacity of Parties
Only parties who have the age of majority and who are not disqualified by law can enter into the contract of insurance.
Minors, lunatics, etc can not conclude insurance contracts. All the conditions stipulated in the Law of contract Act and the Age of Majority Act apply even to insurance contracts.
5. Consideration in Insurance contract
The consideration in the contract of insurance is called the “premium”
A premium is a consideration in the contract of insurance, tendered by the insured or his agent to the insurer or their agent for their undertaking to pay the sum insured on the happening of the event insured against.
The premium paid must be equal to the risk run. The amount of premium therefore depends on the amount of the risk. By section 71(1) of the Insurance Act, 1996 every table or statement of the rates of premium which the insurer ordinarily charges must be deposited with the Commissioner of Insurance. And by section 101(1) the insurer is prohibited from making any discrimination in respect of the rate of premiums charged or between life policies which are of the same kind and under which the persons whose lives are insured have equal life expectancy.
The premium must be paid by the insured, his agent or any other person at the direction of the insured. The premium is usually aid in money form unless otherwise expressed.
By s. 135 of the insurance Act, 1996 an employer who fails or delays to remit premiums, deducted from the salaries of his employees commits an offence and is liable to pay double amount delayed or six months jail or both punishments.
On payment of premium the postal rule apply if the insured was expressly authorised to pay premium through the post office.
Effects of premium
In the absence of any term to the contrary, one a premium is paid, the contract is concluded
Return of premium.
There is a return of premium in the following circumstances:-
(a) Where the parties were never ad idem
(b) If the insurers who issued the policy acted ultra vires
(c) Where the policy is illegal
(d) Where there has been fraud or breach of duty of good faith on the part of insurers
(e) If at the time of commencing the risk, the subject matter does not exist
(f) Where the subject matter is not capable of identification
(g) Where the insured has no insurable interest in the subject matter of insurance
No return of premium
1. Where there is no failure of consideration i.e the risk has attached
2. Where the failure of consideration is attributable to the insured
3. If there is a forfeiture clause
Assignment in Insurance Contracts
The contract of Insurance can be assigned. Thus both the subject matter of insurance (except life and personal accident) and the policy of Insurance can be assigned.
An assignment is a transfer of property, some interest in the property or a chose in action by one person to another person. The person who transfers such property, interest or chose in action is called an assignor.
The person to whom such property, interest or chose in action is transferred is called an assignee
How to effect a transfer
The transfer may be by deed or if a movable property is concerned by actual handing over of the assigned property.
Types of Assignment
(a) Legal assignment
(b) Equitable assignment
Where there is a deed for assignment, it is said that there is a legal assignment.
Where assignment is other than by deed it is called equitable assignment.
Reference:-
Section 136 of the UK, Law of Property Act, 1925
For a legal assignment to take place the following must be fulfilled:-
(a) The assignment should be in writing
(b) It must be an assignment of the whole debt or policy
(c) It must be an absolute assignment
(d) Notice of assignment should be given to the debtor or insurer
The assignment of the subject matter
Normally insurance contracts contain clauses restricting assignment. However, where there is operation of the law e.g in case of bankruptcy or death of the insured the subject matter passes to the legal representatives or trustees in bankruptcy.
It should however, be noted that, the assignment of the subject matter of insurance does not automatically transfer the interest in the policy of insurance.
Assignment by operation of the law
Assignment by operation of the law takes place on the death or bankruptcy of the insured. Upon the death of the insured, the subject matter of insurance passes to the name of the personal legal representative of the insured. The policy is valid.
The personal legal representative must produce the insured’s death certificate; probate or letters of administration. A probate is necessary where the deceased insured has left a will while letters of administration are necessary where the deceased died without a will and the person who holds letters of administration is called an administrator. The person who holds the probate is called an executor.
When the insured becomes bankrupt, his property passes to the trustee in bankruptcy for the benefit of his insured creditors.
Refer a case of Roger Lynch v Robert Daizel (1720) 4Bro. Parl. Case 431.H.L. at page 105 of Mwakajinga’s book.
The creation of Trust or Mortgage
Trust
A trust is said to be created where one person transfers his property or interest to another person for the benefit of a third party or himself.
The person who transfers the property is called a testator and the person to whom the property is transferred is called cestui qui trust or beneficiary.
The property so transferred is called a trust property.
Where the transfer of such property is without consideration and does not divest the insured of his interest, the policy is valid i.e. should a claim arise, the insured will be indemnified.
Mortgage
A mortgage is the transfer of property called mortgage property from one person to another in consideration of money advanced from mortgagee to the mortgagor.
The transferor of the mortgage property is called the mortgagor; whereas the transferee of the mortgage property is called the mortgagee. The transfer of property in the mortgage is not complete because the mortgagor has a right of redemption. Such right is called the equitable right of redemption. See section 57 of the Land Registration Act, Cap.334 and section 2 of the Land Act, No.5 of 1999. A mortgage is also an interest in the right of occupancy or lease securing the payment of money or money’s worth or the fulfilment of a condition and includes a sub-mortgage and the instrument creating a mortgage.
What constitutes a valid assignment?
In order to constitute a valid assignment, there must be consent of the insurer and contemporarily of assignment of the policy and the subject matter.
Contemporaneity of assignment
For an assignee to be indemnified, the assignment of the policy must be accompanied with a transfer of interest in the subject matter of insurance. The assignment of the insurance policy without the assignment of the interest in the subject matter is invalid. See section 51 of the Marine Insurance Act, 1906.
The Notice
The notice of assignment must be given to the insurer. See section 3 of the Policies of Insurance Act, 1867(UK).Also, under section 33(2) of the Merchant Shipping Act, 1967 mortgaging of a ship or a share shall be entered into the register book. Under section 60(1) of the Land registration Act, cap.334 and section 116(1) of the Land Act, 1999- mortgages shall rank according to the order in which they are registered.
The importance of notice of assignment is in settling claims. Claims are settled according to the notice which is called priority of notice. See section 3 of the (UK) Policies of Assurance Act, 1867.
The effect of assignment of the Policy
The assignment of the policy of insurance entitles the assignee every right in the policy as an insured. He has to observe the conditions in the insurance policy. The assignee in his name may enforce the rights in the insurance policy. See section 50(2) of the UK Marine Insurance Act, 1906.
The discharge of the Contract of Insurance
The contract of insurance may be discharged in the following ways:-
(a) By performance
(b) By breach
(c) By agreement
(d) By frustration
(e) By novation
The effect of discharge is to release parties from their obligations. Their relationship under the contract ceases and determines.
(a) The discharge by performance
After performance to the satisfaction of either party, the contract comes to an end. Discharge by performance is also when the terms of insurance expires
(b) The discharge by breach
There is a discharge by breach where a party to it breaks an obligation imposed by the contract. The other party has a right to claim for damages.
(c) The discharge by agreement
The parties may agree to come to an end with their contract. Under the insurance contract, the contract may be cancelled by either party upon serving notice within a prescribed period to the other party. The parties therefore are discharged from their contractual obligations.
(d) Novation
This is where parties agree to substitute a new contract or the old one. In this the parties are discharged from performing their obligation under an old contract. However, they are bound by the terms of the new contract.
(e) By frustration
A contract is said to be discharged by frustration where the performance of it is rendered impossible by the external forces beyond the control of the parties to the contract. Thus a contract will be discharged by frustration where there is for instance death or insanity of one of the parties to the contract, unless the contract can be performed by representatives. If there is liquidation of the company or operation of the law, e.g. operation of the new legislation which bars the continuance of the contract
TOPIC FOUR
Void and Illegal Insurance Contracts
Wagering contracts are illegal while insurance contracts are legal. See section 30 of the Law of contract Act, cap.433 of 1961.
A wagering contract or gaming is a promise to give money or money’s worth upon a happening of or non happening of a certain event. E.g. betting
Wagering contracts are very similar to insurance contracts, but their main differences are the following:-
In wagering contract the risk is voluntarily assumed while in insurance contracts the risk is not voluntarily assumed but uncertain
There is no insurable interest in wagering contracts while there must be an insurable interest in the contract of insurance for one to be paid
There is no loss, damage or liability in the wagering contract’s event while there must be loss, damage or liability in insurance contract to which the insurance intends to mitigate
There is no indemnity after adventure in wagering contracts, it is pure for profit making whereas the insured is indemnified in insurance contract after adventure.
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