LW 721 MARKING SCHEME 2009
LW 721-SUPPLEMENTARY EXAMINATION MARKING SCHEME
QUESTION ONE [25 marks]
Describe the following terms as used in the law of insurance
(a) Subrogation
(b) Indemnity
(c) Insurable interest
(d) Proximate Cause of Loss
(e) Average
(a) SUBROGATION
Literally means “to stand in place of”. It is the right of one person to stand at law in the place of another and to avail him of all rights and remedies of that other person. The insurer who has paid a loss is put in the place of the assured so that he can take the advantage of any means available to the assured to extinguish or diminish the loss for which the insurer has indemnified the assured.
(b) Indemnity
Is perhaps the most fundamental principle of insurance law. Object of indemnity is to place the insured after the loss in the same position he occupied immediately before the loss. He is not to be placed in a better or worse position.
Not all insurance contracts are contracts of indemnity e.g. life insurance. Indemnity is important as it deals in part with moral hazard.
Indemnity does not imply that the insured will be indemnified to the full value of his loss e.g. a person whose factory is destroyed by fire cannot recover for loss of profits or against any liability that may arise from the fire unless he has appropriate policies in place specifically designed to deal with these losses.
(c) Insurable interest
The term insurable interest can be defined as a legal or equitable benefit acquired or damage, detriment or prejudice suffered, on the happening or non-happening of the peril insured against. It is a pecuniary loss or benefit the insured enjoys or suffers on the happening or non-happening of the event insured against. The governing principle is that, the interest must be an enforceable one.
• Insurable interest distinguishes contracts of insurance from gambling in order to define the legitimate area of insurance business.
Insurable interest is required for all types of insurance and its absence renders the contract void and hence unenforceable
(d) Proximate cause of loss
"Proximate cause means the active, efficient motion that sets in motion a train of events, which brings about a result, without the intervention of any force started and working actively from a new and independent source."
Proximate cause is the dominant cause - it does not have to be the first.
(e) Average
Average is a concept used by insurers to deal with under-insurance. Under-insurance occurs when an item is insured for less than its market value.
In terms of the common law the general rule is that a person who under-insures his property is entitled to the full amount of his loss whether total or partial subject to the limits of the policy in the absence of any provision in the policy to the contrary e.g. if a house worth R500 000 is insured for R300000 and a loss of R100 000 occurs the insured in the absence of an average clause in the policy would be entitled to R100 000. By implication therefore average is an alien concept to the common law. The rationale behind average is that the insured should pay a premium that is commensurate with the risk he introduces to the pool to avoid prejudicing other contributors.
QUESTION TWO [25 Marks]
(a) Explain what factors should be proved in order to avoid liability on the ground of non-disclosure [6 Marks]
(b) What are the broker’s responsibilities for premium?[ 6 Marks]
(c) What are the three main duties of an agent? [3 Marks]
(d) What are the rights and powers of the Principal [ 5 Marks]
(e) What are the third parts rights and liabilities? [ 5 Marks]
(a) Factors to be proved in order to avoid liability on the ground of non disclosure. [6 MARKS]
To avoid liability on grounds of non-disclosure the onus is on the insurer to prove that:
(1) The undisclosed facts were material.
(2) That the facts were within the actual or presumed knowledge of the insured.
(3) That the facts were not communicated to the insurer.
(b) Broker’s responsibility for premium [6 MARKS]
s.57(1) A broker shall be liable to a Tanzania insurer for all premium collected by him and all premium due to the insurer by virtue of insurance effected at the instruction of the broker.
(2) A broker shall remit to the insure all premium due to the insurer within the time specified by regulations made under the provisions of this Act.
(3) All money received by a broker either from or for a client shall be deposited in a separate trust account and shall not in any circumstances be mixed with money belonging to the broker, money earned by way of interest on sums deposited in the trust accounts shall accrue to the benefit of the broker:
(c) Three main duties of an agent [ 3 marks]
-Duty to carry out the transaction
-Duty to obey instructions
-Duty of care and skill
-Duty to account
-Duty to act honestly
-Duty not to jeopardise his principal’s interests with his own or another principal
-Duty not to make a secret profit
-Duty not to accept bribes
-Duty not to delegate his authority
(d) Rights and Powers of the Principal [ 5marks]
-The principal has a power and right to ratify or disown acts o an agent done on his behalf but without his knowledge (s.148 LCA)
-He has the right to revoke the agent’s power. (s.153 LCA)
-He has a right to claim compensation for loss sustained or claim profits which are a results of the acts of an agent acting against is directions.(s.158 LCA)
-He has a right to claim compensation for loss arising due to agent’s negligence, want of skill and misconduct. (S.164 LCA)
-Right to repudiate transactions of an agent who has no authority
(e) Third party rights and liabilities [5 marks]
-To enforce a contract negotiated by an agent
-To enforce a contract against agent or principal where the agent is personally liable
-To hold the principal liable for misrepresentation made or frauds committed by an agent in the course of business
-To claim compensation form an agent in respect of any loss
-Not to be prejudiced by ratification of unauthorised acts
QUESTION THREE [25 marks] therefore 5 marks for each point.
Five factors that justifies the duty of utmost good faith
(1) There is information asymmetry between the insured and the insurer. The insured knows more about the risk than the insurer hence the law must compel disclosure.
(2) Without the duty of disclosure the insurance market cannot operate efficiently such that the supply side of insurance can be disrupted.
(3) Disclosure enables the insurer to quantify and price the risk appropriately.
(4) Disclosure also enables the insurer to determine appropriate policy terms and conditions to be incorporated in the policy. It enables the insurer to determine the extent to which the risk being presented deviates from the norm.
(5) Disclosure also helps insurers manage the problem of adverse selection.
QUESTION FOUR [25 Marks]
Explain your understanding of the following terms
(a) Indemnity insurance
(b) Contingency insurance
(c) The policy of insurance
(d) Prudent insurer
(e) Warranty
(a) Indemnity insurance –is 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
(b) Contingency-is 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
(c) 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.
(d) Prudent insurer- and insurer who discharges all his obligations with regards to conclusion of insurance contracts
(e) 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
QUESTION FIVE [25 Marks]
Attempt the following set of questions
(a) Under which circumstances can a premium be returned? [6 marks]
• -Where the parties were never ad idem
• -If the insurers who issued the policy acted ultra vires
• -Where the policy is illegal
• -Where there has been fraud or breach of duty of good faith on the part of insurers
• If at the time of commencing the risk, the subject matter does not exist
• Where the subject matter is not capable of identification
• Where the insured has no insurable interest in the subject matter of insurance
(b) Which factors must be fulfilled for a legal assignment to take place? [ 4 marks]
(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
(c) What constitutes a valid assignment? [5 marks]
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.
(d) What are the five ways can a contract of insurance be discharged? [5 marks]
(a) By performance
(b) By breach
(c) By agreement
(d) By novation
(e) frustration
(e) By examples, what do you understand by the term “agency of necessity”? [ 5 marks]
Necessity-a person may have authority to act on behalf of another in certain cases where he is faced with a emergency in which the property or interest of that other are in imminent jeopardy and it becomes necessary, i order to preserve the property or interest, so to act. Sometimes this may entitle him to affect his principal’s legal position by making contracts or disposing of property
QUESTION SIX [25 Marks] therefore 5 each
Wagering contracts are very similar to insurance contracts, but their main differences are…………… (Explicate them)
1. In wagering contract the risk is voluntarily assumed while in insurance contracts the risk is not voluntarily assumed but uncertain
2. 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
3. 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
4. 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
QUESTION ONE [25 marks]
Describe the following terms as used in the law of insurance
(a) Subrogation
(b) Indemnity
(c) Insurable interest
(d) Proximate Cause of Loss
(e) Average
(a) SUBROGATION
Literally means “to stand in place of”. It is the right of one person to stand at law in the place of another and to avail him of all rights and remedies of that other person. The insurer who has paid a loss is put in the place of the assured so that he can take the advantage of any means available to the assured to extinguish or diminish the loss for which the insurer has indemnified the assured.
(b) Indemnity
Is perhaps the most fundamental principle of insurance law. Object of indemnity is to place the insured after the loss in the same position he occupied immediately before the loss. He is not to be placed in a better or worse position.
Not all insurance contracts are contracts of indemnity e.g. life insurance. Indemnity is important as it deals in part with moral hazard.
Indemnity does not imply that the insured will be indemnified to the full value of his loss e.g. a person whose factory is destroyed by fire cannot recover for loss of profits or against any liability that may arise from the fire unless he has appropriate policies in place specifically designed to deal with these losses.
(c) Insurable interest
The term insurable interest can be defined as a legal or equitable benefit acquired or damage, detriment or prejudice suffered, on the happening or non-happening of the peril insured against. It is a pecuniary loss or benefit the insured enjoys or suffers on the happening or non-happening of the event insured against. The governing principle is that, the interest must be an enforceable one.
• Insurable interest distinguishes contracts of insurance from gambling in order to define the legitimate area of insurance business.
Insurable interest is required for all types of insurance and its absence renders the contract void and hence unenforceable
(d) Proximate cause of loss
"Proximate cause means the active, efficient motion that sets in motion a train of events, which brings about a result, without the intervention of any force started and working actively from a new and independent source."
Proximate cause is the dominant cause - it does not have to be the first.
(e) Average
Average is a concept used by insurers to deal with under-insurance. Under-insurance occurs when an item is insured for less than its market value.
In terms of the common law the general rule is that a person who under-insures his property is entitled to the full amount of his loss whether total or partial subject to the limits of the policy in the absence of any provision in the policy to the contrary e.g. if a house worth R500 000 is insured for R300000 and a loss of R100 000 occurs the insured in the absence of an average clause in the policy would be entitled to R100 000. By implication therefore average is an alien concept to the common law. The rationale behind average is that the insured should pay a premium that is commensurate with the risk he introduces to the pool to avoid prejudicing other contributors.
QUESTION TWO [25 Marks]
(a) Explain what factors should be proved in order to avoid liability on the ground of non-disclosure [6 Marks]
(b) What are the broker’s responsibilities for premium?[ 6 Marks]
(c) What are the three main duties of an agent? [3 Marks]
(d) What are the rights and powers of the Principal [ 5 Marks]
(e) What are the third parts rights and liabilities? [ 5 Marks]
(a) Factors to be proved in order to avoid liability on the ground of non disclosure. [6 MARKS]
To avoid liability on grounds of non-disclosure the onus is on the insurer to prove that:
(1) The undisclosed facts were material.
(2) That the facts were within the actual or presumed knowledge of the insured.
(3) That the facts were not communicated to the insurer.
(b) Broker’s responsibility for premium [6 MARKS]
s.57(1) A broker shall be liable to a Tanzania insurer for all premium collected by him and all premium due to the insurer by virtue of insurance effected at the instruction of the broker.
(2) A broker shall remit to the insure all premium due to the insurer within the time specified by regulations made under the provisions of this Act.
(3) All money received by a broker either from or for a client shall be deposited in a separate trust account and shall not in any circumstances be mixed with money belonging to the broker, money earned by way of interest on sums deposited in the trust accounts shall accrue to the benefit of the broker:
(c) Three main duties of an agent [ 3 marks]
-Duty to carry out the transaction
-Duty to obey instructions
-Duty of care and skill
-Duty to account
-Duty to act honestly
-Duty not to jeopardise his principal’s interests with his own or another principal
-Duty not to make a secret profit
-Duty not to accept bribes
-Duty not to delegate his authority
(d) Rights and Powers of the Principal [ 5marks]
-The principal has a power and right to ratify or disown acts o an agent done on his behalf but without his knowledge (s.148 LCA)
-He has the right to revoke the agent’s power. (s.153 LCA)
-He has a right to claim compensation for loss sustained or claim profits which are a results of the acts of an agent acting against is directions.(s.158 LCA)
-He has a right to claim compensation for loss arising due to agent’s negligence, want of skill and misconduct. (S.164 LCA)
-Right to repudiate transactions of an agent who has no authority
(e) Third party rights and liabilities [5 marks]
-To enforce a contract negotiated by an agent
-To enforce a contract against agent or principal where the agent is personally liable
-To hold the principal liable for misrepresentation made or frauds committed by an agent in the course of business
-To claim compensation form an agent in respect of any loss
-Not to be prejudiced by ratification of unauthorised acts
QUESTION THREE [25 marks] therefore 5 marks for each point.
Five factors that justifies the duty of utmost good faith
(1) There is information asymmetry between the insured and the insurer. The insured knows more about the risk than the insurer hence the law must compel disclosure.
(2) Without the duty of disclosure the insurance market cannot operate efficiently such that the supply side of insurance can be disrupted.
(3) Disclosure enables the insurer to quantify and price the risk appropriately.
(4) Disclosure also enables the insurer to determine appropriate policy terms and conditions to be incorporated in the policy. It enables the insurer to determine the extent to which the risk being presented deviates from the norm.
(5) Disclosure also helps insurers manage the problem of adverse selection.
QUESTION FOUR [25 Marks]
Explain your understanding of the following terms
(a) Indemnity insurance
(b) Contingency insurance
(c) The policy of insurance
(d) Prudent insurer
(e) Warranty
(a) Indemnity insurance –is 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
(b) Contingency-is 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
(c) 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.
(d) Prudent insurer- and insurer who discharges all his obligations with regards to conclusion of insurance contracts
(e) 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
QUESTION FIVE [25 Marks]
Attempt the following set of questions
(a) Under which circumstances can a premium be returned? [6 marks]
• -Where the parties were never ad idem
• -If the insurers who issued the policy acted ultra vires
• -Where the policy is illegal
• -Where there has been fraud or breach of duty of good faith on the part of insurers
• If at the time of commencing the risk, the subject matter does not exist
• Where the subject matter is not capable of identification
• Where the insured has no insurable interest in the subject matter of insurance
(b) Which factors must be fulfilled for a legal assignment to take place? [ 4 marks]
(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
(c) What constitutes a valid assignment? [5 marks]
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.
(d) What are the five ways can a contract of insurance be discharged? [5 marks]
(a) By performance
(b) By breach
(c) By agreement
(d) By novation
(e) frustration
(e) By examples, what do you understand by the term “agency of necessity”? [ 5 marks]
Necessity-a person may have authority to act on behalf of another in certain cases where he is faced with a emergency in which the property or interest of that other are in imminent jeopardy and it becomes necessary, i order to preserve the property or interest, so to act. Sometimes this may entitle him to affect his principal’s legal position by making contracts or disposing of property
QUESTION SIX [25 Marks] therefore 5 each
Wagering contracts are very similar to insurance contracts, but their main differences are…………… (Explicate them)
1. In wagering contract the risk is voluntarily assumed while in insurance contracts the risk is not voluntarily assumed but uncertain
2. 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
3. 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
4. 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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