Lecture 2

Insurance Law
Overview
„ Principles of Insurance
‰ Insurable interest
‰ Indemnity

‰ Proximate cause

‰ Utmost good faith

Insurable Interest
 Insurable Interest
Definition:
Insurable Interest is a relation between the
insured and the event insured against such that
the occurrence of the event will cause
substantial loss or injury of some kind to the
assured.
Subject matter of insurance
‰ Fire – building, stock or machinery

‰ Liability – legal liability for injury or damage

‰ Life – life being assured

‰ Marine – hull or cargo

Insurable Interest
The leading Roman-Dutch law case
Littlejohn v Norwich Union Fire Insurance Society 1905 TH 374

held that if the insured can show that he stands to

lose something of an appreciable commercial value
by the destruction of the thing insured then his
interest will be an insurable one.
Insurable Interest
Essentials
„ There must be some property, right, interest, life, limb or
potential liability capable of being insured;
„ This property, right, interest etc which must be the subject
matter of insurance
„ Insured must stand in a relationship with subject matter of
insurance whereby from its safety, well being or freedom from
liability and would be prejudiced by its loss, damage or
existence of liability
„ Relationship between insured and subject matter of insurance
must be recognised at law
Insurable Interest

Creation of Insurable Interest

„ By Common Law

„ By Contract

„ By Statute
Insurable Interest - creation
„ Ownership
„ Legal possession
„ Custody of property belonging to others e.g.
bailees
„ Marriage - spouses have an insurable interest in
each other’s life
„ A lien-holder has insurable interest in the property
subject to lien
„ A debt creates insurable interest between debtor
and creditor
„ An employer has an insurable interest in the life of
an employee
Insurable interest in life insurance

„ On your own life

„ Close ties of blood or marriage
„ When pecuniary interest is involved
„ must be met only at the inception of the
policy, not at the time of death
Insurable Interest in Property
Insurance
„ Part or Joint Ventures
„ Mortgagees and Mortgagors
„ Executors and Trustees
„ Bailees
„ Agents
„ Husband and Wife
Does a share-holder has insurance interest?
Insurable Interest in Liability Insurance
„ A person has insurable interest to the extent
of any potential liability may be incurred by
way of damages or other costs.
„ It is not possible to pre-determine the extent
of interest because there is no way of
knowing
‰ How often one may incur it
‰ What would be its monetary value
Insurable Interest of Insurer

Insurer may insure with another

insurer part or all of the risk they
have assumed – reinsurance
Insurable Interest

When must it exist?

‰ Marine insurance - at the time of loss
‰ Life insurance - at the inception of the
policy; continuing insurable interest is not necessary
‰ Other Insurances – at the time of loss
and also at inception
Indemnity
Indemnity
Definition:
A contract of indemnity is one in which
the promiser promises to make good
the loss that occurs to the promisee on
the happening of an event.
‰ Indemnity Contract – Fire or Marine Insurance
‰ Non-indemnity Contract – Life Insurance
How is indemnity provided

„ Cash Payment
„ Repair

„ Replacement

„ Reinstatement
Factors limiting Indemnity
„ Average
‰ loss sustained X Sum insured/Market value
„ Deductibles
‰ Excess
‰ Franchise
„ Limits
‰ Sum Insured
‰ AOA
‰ AOY
„ First Loss policies
Extensions in Operation of
Indemnity

„ Reinstatement
„ Contract Price Insurance

„ Agreed Additional Costs

„ Valued Policies
‰ Marine
‰ Fire
Indemnity - corollaries
„ 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.

„ Contribution
‰ It was held in American Surety Co of New York v Wrightson 1910 that
for contribution to apply the 2 policies involved must cover:
„ same interests;
„ same assureds;
„ same adventure;
„ same risk;
„ different or same amounts.
Proximate Cause
Proximate Cause

Definition:
The active efficient cause that sets in motion a
train of events which bring about a result,
without intervention of any force started and
working actively from a new and independent
source.
(Pawsey Vs Scottish Union & National Insurance Co. 1907)

Proximate in efficiency and not in time

‰ Eg: A ship torpedoed while her final loss was due to a storm.

‰ It is not the latest, but direct, dominant, operative and efficient

cause that must be regarded as proximate.

Proximate Cause

In Etherington v Lancashire and Yorkshire

Accidental Insurance Co (1909) a man
fell from a horse and sustained injuries
that prevented him from moving. As a
result he contracted pneumonia due to
lying in the wet and died. The proximate
cause of his death was held to be the
fall not pneumonia.
Utmost Good Faith
Utmost Good faith

Working Definition:
A positive duty voluntarily to disclose,
accurately and fully, all facts material to the
risk being proposed, whether requested or
not.

„ Caveat Emptor Vs Uberrima Fides

Utmost Good Faith

Material Fact:
Every circumstance is material which
would influence the judgment of a
prudent insurer in fixing the premium
or determining whether he will take
the risk
Duty of disclosure

The requirement of utmost good faith is

complimented by the duty of disclosure
which places an obligation on both
parties to the insurance contract to
disclose material facts relevant to the
contract to each other.
Resolving Coverage Disputes
‰ Contracts of Adhesion
„ Ambiguities are interpreted in favor of
policyholder
„ Applied less often to commercial
insurance

‰ Doctrine of Reasonable Expectations

„ Courts interpret contracts as would a
reasonable person not trained in the law
Resolving Coverage Disputes (Cont’d)

„ Bad Faith Suits

‰ If insurers refuse to pay claim cost or
pay too little for claims, policyholders
(or third-party claimants) to sue an
insurer
Important Terms
Important Terms
„ Life Vs Non life
„ Insurance Agent Vs Broker
„ Coinsurance Vs Reinsurance
„ Subrogation Vs Abandonment
„ General Average Vs Particular Average
„ Occurrence Vs Claims Made
In lighter vein!!

„ NEW YORK, NY. (AP 1977) A man,

knocked down by a car, got up uninjured,
but lay back down when a helpful bystander
told him to feign injury in order to collect
insurance money.
The car rolled forward and crushed him to
death.
Thank You