Insurance Law Farhaan Uddin Ahmed

Topic 2: Characteristics of Contracts of Insurance

1. A Contract of Insurance is a "Contract of Indemnity" (except Life Insurance):

In case of loss, under a contract of insurance, the assured shall be fully indemnified (recover the
costs incurred due to the loss) but shall never be more than fully indemnified. This is a fundamental
principle of insurance, and if a proposition is brought forward which is at variance with this
principle, that is to say which prevents the assured from obtaining a full indemnity, that proposition
will certainly be wrong. 1 Under such contracts the insurers undertake to indemnify the insured for
the actual loss suffered by him or her as a result of the event insured against. If X Company, who is
a client of insurance company, insures a Jute godown against fire for an amount of Tk. 10 lacs and
after the godown burns down an amount of Tk. 5 lacs is required to restore it, X can only obtain Tk.
5 lacs from the insurance company and no more.
Policies on property are contracts of indemnity and law would not permit them to be otherwise
construed. The nature of the property or of the risks is quite immaterial. Therefore, if the value of
the goods insured increases after the date of the policy, the insurers are not liable to make good the
loss in respect of the increase in value. A contract of insurance ceases to be a contract of indemnity
if the insurer promises to pay a fixed sum on the happening of the event insured against whether the
assured has suffered any loss or not. From their very nature, contracts of life and accident insurance
belong to this class and in their cases indemnity is not the governing principle. Again, “an
agreement to compensate a man for injuries by accident might seem to be a contract of indemnity,
but in this case, as in the case of an insurance on a man’s own life, the value of the peril insured
against cannot be appraised in money, and, therefore, the injury cannot really be indemnified, for
although the evil result of the bodily injury can often be alleviated by what money will procure,
mere money cannot allay or remove the suffering and, therefore, cannot really constitute an
indemnity.”2 Even contracts of fire or burglary insurance need not necessarily be contracts of
indemnity. If the insurers agree to pay a certain fixed sum irrespective of the loss, the contract is not
one of indemnity.
Where the insurance was against loss of certain specified articles including a pearl necklace and the
necklace disappeared, and the company under agreement with the assured supplied other articles to
take its place and the necklace was later found, it was held that the assured was entitled to retain the
articles supplied by the company. 3 A value policy, in which the value is agreed beforehand, it will
be conclusive for all purposes against the insurer and the insured and will be considered to be a
contract of indemnity.4
2. Contracts of Insurance are Uberrimae Fidei (a contract based on utmost good faith):

1
Pv Chetty v Motor Union Insurance Co., Air 1923 Rang. 366.
2
Porter’s Law of Insurance, 8th Ed.
3
Holmes v Pain, 1930 2 KB 301.
4
Blascheck v Bussell, 1916 33T. L. R. 51.

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Generally, misrepresentation will render a contract voidable at the option of the party deceived. But
in case of contract of insurance, something more is required in addition to the absence of
misrepresentation. Upon a contract of insurance being negotiated, every material fact within the
knowledge of the assured must be disclosed which would likely affect the judgment of the insurer
and if any information, which is within the knowledge of the assured, is withheld the contract may
be avoided by insurer. Since insurance is a contract that shifts risk from one party to another, it
requires utmost good faith from both the sides.5 For example, a ship owner, upon hearing that a
vessel similar to his one was captured affected an insurance of his ship without disclosing the said
information to the underwriter. In this case, the underwriter can avoid the liability as utmost good
faith had not been observed by the insured (the ship owner) at the time of taking out the policy.
No contract can be good unless it is equal, that is, neither side must have an advantage by any
means of which the other is not aware. This being admitted of contracts in general, it holds with
double force in case of insurance because the underwriter computes his risks entirely from the
account given by the insured. The underwriter must, therefore, rely on the insured for all necessary
information and must trust that he or she will not conceal anything so as to cause the underwriter to
make a wrong estimate. If a mistake does occur without any fraudulent intention, the contract is
still annulled, because the risk is not the same which the underwriter thought it to be. Good faith
forbids either party from concealing which he or she privately knows to draw the other into
bargain. In case of insurance a party is required not only to state all facts within his or her
knowledge but also which he or she believes to be material to the question of insurance. If the
insured conceals anything that he or she knows to be material, then it is considered fraud; but
besides that if he or she conceals anything that might have influenced the rate of premium,
although he or she did not know that it would have had that effect, then such concealment vitiates
the policy.6
Proposal Form generally forms the basis of Contracts of Fire Insurance:
If a question in the policy form is wrongly answered and if that question forms part of the basis of
the contract, then the contract is voidable at the option of the insurer. The same rationale also
applies to misstatement of information or making of false statements in the proposal form; although
that information may not be materially significant for the ascertainment of risk for the insurer.
Since most insurance policies specifically state that the proposal form is the basis of the insurance
contract, any misstatement, mistake or concealment of information automatically gives the insurer
the right to avoid the contract.
The Principle of Uberrimae Fidei in Life Insurance Policies:
Before the issuance of a policy of life insurance a proposal form has to be filled up by the assured.
This consists of a number of inquiries as to life, habits and antecedents of the proposer or would be
assured. The answers must be made with great care and truthfulness because the form of the
proposal itself is treated as a part of the contract of insurance policy. A contract of insurance is

5
Shiv Kumar Radha Krishin Das v North British & Mercantile Co., AIR 1936 Sind. 222.
6
London Assurance v Mansel, 1879 11 Ch D. 363.

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voidable (at the instance of the insurer) when the insured withholds a material fact since the same
contravenes the principle of uberrinae fidei. 7
While submitting a proposal for insurance, it was answered by the assured in reply to questions
asking whether previous proposals on his life had been made to any other insurance office. And if
so, whether they had been accepted at the ordinary rates? Proposer replied that he was then insured
at two insurance offices at the ordinary rates, omitting to disclose that insurance in his life had also
been declined by several other insurance offices. It was held that there was a material concealment
and the policy could be set-aside and declared void.
Therefore, life insurance, like all other forms of insurance, is a contract uberrimae fidei and full
discloser must be made to the insurer of any fact which is likely to affect the mind of a reasonable
and prudent insurer in deciding whether to accept or decline the risk. In the event of any
concealment of such a fact, the policy is voidable. Whether the omission to disclose any particular
circumstance is sufficiently material or not, (so as to render the contract voidable) is a question of
fact in each case. Thus, a proposal form asked the name of any physician who the proposer (would
be assured) had consulted in the last 5 years. The proposer replied "none" though in fact, he had
consulted a doctor and received tonic but he had never been away from his work. The insurer's
doctor said that if he had known of this he would still have recommended the acceptance of the risk
and the policy was not avoided.
Again, in the case wherein between the date of the proposal and the making of the contract, there is
a material alteration of the risk, the disclosure of this alteration must be made, otherwise, the
contract will be voidable. 8 Also note, if the insured makes a statement containing certain
information, and the policy contains a term to the effect that the statement 'is to be taken as the
basis of the contract', then the policy would be voidable if any part of the statement is untrue,
whether it is material or not.

3. The Insured must have an ‘Insurable Interest’ in the Insured Property:

The assured should have an insurable interest in the subject-matter of the insurance, i.e. he or she
must be in such a position that by destruction of or damage to the property he or she stands to
suffer a pecuniary loss. Therefore, a man or a woman can always insure his or her own property; a
trustee may insure the trust property; a mortgagee may insure the mortgaged property; an insurance
company has an insurable interest in any property which has been insured with it and can reinsure
it with another insurance company. Again, a creditor has an insurable interest in the life of his
debtor, to the extent of his claim, to affect a life insurance since the chance of obtaining payment is
considered to be diminished by the death of the debtor.
In England, if a contract of insurance is affected without insurable interest it is expressly declared to
be void as a gaming or a wagering contract under two statutes - The Life Assurance Act, 1774 and
Gaming Act, 1845. But in the Indian subcontinent the necessity of insurable interest is provided by
Section 30 of the Contract Act, 1872 which declares that an agreement by way of wager is void. It

7
London Assurance v. Mansel, 1879 11 Ch. D. 363.
8
Looker v. Law Union and Rock Insurance, l928 I. K.B. 554.

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is to be observed that this section is of a general nature and applies to a contract of insurance as well
as to any other contract. If, therefore, any person affects insurance on the life of another in which he
or she has no insurable interest or in respect of property in which he or she has no insurable interest,
then that contract is void under section 30 of the Contract Act, 1872.
In short, “Where the assured is so situated that the happening of the event upon which the insurance
is to become payable would, as a proximate result involve the insured in the loss or the diminution
of any right recognized by law or in any legal liability, there is an insurable interest to the extent of
the possible loss or liability.”9
Insurable Interest in Life Insurances:
A person may insure his own life up to any extent, as he is supposed to have an unlimited interest in
his own life, or he may insure the life or lives of those dependents upon him, or through whose life
he is likely to suffer a pecuniary loss. But, if he insures the life of a person with whom he has no
insurable interest, it comes under the category of wagering contracts and therefore, void. It is also
essential that the insurable interest should exist at the time the insurance contract is affected and the
policy is made out. Thus, one has an insurable interest in the life of his/her spouse to any extent. A
creditor has an insurable interest in the life of his debtor to the extent of his claim, as the chance of
obtaining payment is considered to be diminished by the death of the debtor. Again, a surety has an
insurable interest in the life of the principal debtor to whom he is entitled to look for indemnity.
But, there is no presumption that a father has an insurable interest in the life of his child. Therefore,
a parent cannot make a valid insurance on the life of his child, unless he has a pecuniary interest in
it. The expense of education, being a mere moral obligation, does not of itself confer such an
interest. Neither has a child who has attained his majority any insurable interest in the life of his
parent. But a father when possessed of any interest in property dependent upon the life of his son
may insure the life of his child and the same rule applies to a child insuring the life of his parent.
In life insurance cases, ‘insurable interest’ is presumed in the following two types of cases where no
proof of such interest is required:
(a) Insurance by a person on his own life, because “a man does not gamble on his own life to gain a
pyrrhic victory by his own death.” 10
(b) Insurance by a man on life of his wife and vice versa.
In Halford v Kymer, it was held that interest means pecuniary interest. But there are two cases in
which the law presumes pecuniary interest. The one is the interest of a man in his or her own life.
The second exception is with regard to a spouse making insurance on the life of his or her
significant other. It is to be noted that the aforementioned cases form an exception to the general
rule laid down in Halford v Kymer, that insurable interest in the cases of life assurance means
pecuniary interest. The interest in these two exceptional cases is much higher than any pecuniary
interest and is incapable of valuation. When the life insurance is affected on the life of some other
person then a pecuniary interest must be shown, and the assured cannot recover more than the value

9
Macgillivray’s Laws of Insurance, 2nd Ed.
10
Griffith v Fleming, 1909 1KB 805.

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of his or her interest at the time the contract was made. The pecuniary interest which is necessary to
be proved in order to establish an insurable interest must be definite and capable of valuation. 11

4. Contracts of Insurance are Contracts of Speculation but not wagering contracts:

A contract of insurance very closely resembles a gaming or wagering contract. In its simplest form,
a wagering contract is one in which ‘A’ promises to pay ‘B’ a certain sum of money on the
happening or not happening of a particular event. In such a contract the sole criterion is the
uncertainty involved in it and either party stands equally to gain or lose. In Hampden v. Walsh,
Cockburn C.J., defined a wager as a contract by ‘A’ to pay money to ‘B’ on the happening or not
happening of a given event. In Thacker v. Hardy, Cotton, L.J., stated that the essence of gaming and
wagering was that one party was to win and the other was to lose upon a future event which at the
time of making the contract was uncertain. It must be noted that in a contract of insurance as well
there is a fair amount of uncertainty involved. Although the death of a man is certain, the actual
time of its occurrence is uncertain and hence a policy of life insurance may become due after the
payment of two or twenty premiums. Similarly, it is not certain that a fire may take place so as to
entitle the insured to a claim against the insurance company. The fact that insurance in its very
essence is a gaming or wagering contract, was recognised in the earliest stage of the development of
the law of insurance and historically, unscrupulous businessmen have taken full advantage of it.
Even policies on the life of a mere stranger ware not uncommon. Such kinds of insurances led to
very mischievous results and were responsible for a very ridiculous state of affairs. But later
measures were undertaken to amend the situation. Therefore, both contract of insurance and a
wagering contracts are contacts of speculation, but the distinction lies in the fact that unlike a
wagering contract, a contract of insurance is not an agreement to pay money on the mere happening
of a certain event, but is an agreement to compensate the insured for any loss suffered owing to the
occurrence of the event. Fundamentally, an insurable interest in case of any insurance contract is a
necessity.
Therefore, the law has now drawn a rigid differentiation between a contract of insurance and a
simple gaming or wagering contract. If a person has got some interest, pecuniary or otherwise, in
the life or the property sought to be insured he would stand to gain in the continuity of the life and
or in preservation of the property. For him such a contract of insurance is not a wagering contract,
and as observed by Kennedy, L.J., In Griffiths v. Fleming, “A man does not gamble on his life to
gain a pyrrhic victory by his own death” The law requires that in order to effect a valid insurance a
person must prove some kind of interest in the life or the property sought to be insured. This interest
is called insurable interest. Insurable interest takes the venom of wager out of a contract of
insurance, and only that amount of speculation is now retained is also validly found in any other
business transaction. A contract made without the necessary interest are degraded to the level of a
wager, and are illegal and void.

5. Causa Proxima or Proximate Cause:

11
Barnes v. London, Edinburgh and Glasgow Life Assurance Co., 1892 1Q.B. 864.

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The rule of Causa Proxima means that the cause of the loss must be proximate or immediate and
not remote. If the proximate cause of the loss is a peril insured against, the insured is eligible to be
indemnified. When a loss has been brought about by two or more causes, the question arises as to
which is the causa proxima. In such cases, the real or the nearest cause shall be the causa proxima,
although the result could not have happened without the remote cause. But if the loss is brought
about by any cause attributable to the misconduct of the insured then the insurer will not be liable to
indemnify the insured.
Consideration of Loss or Damages in Fire Insurance Policies:
Loss or damage caused by a fire from the perspective of a fire insurance policy means the loss or
damage that is either caused by ignition of the articles or objects, by ignition of a part of the
premises (building, flat, etc.) where the articles are kept. The estimation of damage not only
includes the damage that is caused by scorching of the articles or the premises but also includes the
damage that results from the scorching of articles or the premises such as falling in of the roof or
breaking down of a wall. Damage which occurs as a result of smoke produced by the fire or due to
efforts at putting out the fire; for example, spoiling of goods by the water that was used to
extinguish the fire, throwing furniture out of the window in an attempt to contain the fire or
breaking down of the door or window to enter the premises, are also generally covered by a fire
insurance policy. In fact, every loss directly caused or consequentially resulting from the fire is
generally covered by a fire insurance policy. In some policies, loss of goods due to theft or burglary
during a fire is also covered as a fire risk. Even loss occurring due to a fire caused by the insured’s
negligence is generally covered by a fire insurance policy. The coverage of loss or damage due to
fire is also largely governed by individual policy documents themselves, where the ‘perils covered’
and those which are not covered are specifically mentioned in the policy itself. Fire insurance policy
covers "all perils" and perils which are proximate cause of the loss. Usually insurers restrict their
liability for loss due to fire caused by an earthquake, riot, military action or vandalism.
Cause Proxima in Marine Insurance:
It is a fundamental principle underlying the contract of marine insurance that in order to make the
underwriter liable for a loss such loss must have been proximately caused by a peril insured against.
The underwriter is not liable for any loss attributable to the willful misconduct of the assured. But
any loss caused by any peril insured against must be paid off by the underwriter, notwithstanding
the fact that the said loss had been brought about by the negligence or misconduct of the master or
the crew. When a loss, however, has been brought about by a succession of causes, the rule is that
in marine insurance law you must look only to the nearest cause, although the result would no
doubt, have not happened without the remote cause such as:
(a) An underwriter is not liable for damage to the cargo directly caused by rats, but if the rats
gnawed holes in the leap pipe of the bathroom on board a ship, in consequence of which sea-water
poured into the hold and damaged the cargo, the proximate cause of the damage would be sea water
and the underwriter would be liable though but for the rats' partiality for lead pipes, the damage
would not have happened.
(b) If rice insured against the perils of the sea, is heated and rendered useless owing to closing of the
ventilators against rain and storm, the underwriter cannot be held responsible on the policy.

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6. Undertaking of Risk:
In a contract of insurance, the insurer undertakes to protect the insured from a specified loss and the
insurer receives a premium for running the risk of such loss. Thus, a risk must be attached to a
policy. Risk commences at the time when a binding contract of insurance is entered into; or from
the date of the policy. If an oral contract to insure is otherwise complete, the risk may commence
immediately on its completion even before the issuing of a policy; provided the first premium has
been paid. Delivery of the policy to the insured is not a condition precedent to the commencement
of the risk. If the proposal is for an insurance on the life of a third person, and if he or she is dead at
the time of creation of the contract but it is not known to the insured or the insurer, then there is no
valid contract and the risk never attaches.
The parties to a contract of insurance may agree that the policy is to come into force from a
particular time, and therefore, the commencement of the risk may depend upon the intention of the
parties, which is to be gathered from the language of the policy or by the circumstances of the case.
For the purpose of commencement of the risk two factors have to be considered; (a) the issuance of
a policy by the insurer, and (b) the payment of the premium. The issuance of a policy, in the
absence of anything to the contrary, marks the commencement of the risk, and the question of the
payment of the premium is in such cases irrelevant. Where the insurance company on the receipt of
the proposal for insurance issues a risk note covering the risk, the fact by itself constitutes a contract
of insurance for a certain time and the risk commences from the date of issuance of the note. But if
a condition in the policy provides that the policy is to come into force only on the payment of the
first premium then though the risk begins to run from the date of the issuance of the policy, the
liability of the insurers only begins upon the payment of the first premium. It is well settled in
insurance law that in case life insurance policies risk does not attach till the payment or tender of
the first premium. Thus, unless there is amongst the conditions of the issuance of a policy an
express stipulation that the policy shall not become effective until the first premium has been paid
the policy becomes effective from the date of its signature by the company. 12 A contract of
insurance may provide that the risk is to commence from some prior date, notwithstanding any loss
or alteration or risk which may have occurred at the time the insurers accept the proposal. But the
company would not be liable if at the time the proposal was made the applicant knew that the loss
has already occurred, and if the knowledge of the loss or of the alteration of risk had come to the
applicant after the proposal was made, he or she is bound to disclose it to the insurers in conformity
with the principle of uberrimae fidei. A typical instance of an anti-dated policy is where it is issued
to replace a cover note already issued to the insured. In a case, a development officer of an
insurance company inspected a factory and agreed to insure the same. He accepted a cheque
representing a premium and handed over a signed cover notice but he took back the cover notice on
the plea that an insurance policy would soon be issued. Subsequently, a claim was filed but it could
not be proved that the cover note had actually been handed over and it was held that there was no
contract of insurance. 13

12
V Son Dav v. New Zealand Insurance Co. Ltd., AIR 1934 Rong 343.
13
Nibro Ltd. v. National Insurance Co. Ltd.

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Circumstances affecting the risk:

A widow filed suits against the Life Insurance Corporation for recovery of Rs. 20,000/- and Rs.
30,000/- representing two policies on her husband who died in May, 1955 because of some heart
trouble. The Corporation repudiated the claim on grounds of failure by the assured to disclose that
he was suffering from blood pressure and diabetes. The Court held in that the law lays down a
heavy burden of proof on the insurer, and statements made by the doctors are to be taken as correct
unless evidence to the contrary can be adduced. 14 In the event of the insurer failing to discharge this
burden the court can draw an adverse inference against the company. Again, it was further held that
though the rule of utmost faith is applicable to contracts of insurance. In the case of Mithoolal v.
Life Insurance Corporation the company could successfully repudiated a policy two years after
issuance on the basis of evidence of fraudulent suppression of facts.
It has been held that, a policy can be avoided by the insurer if he or she can establish that the
statements made were inaccurate and false, that such a statement was a material fact, that the
statement was fraudulently made and the maker of the statement at the time of making it was aware
that it was false or he or she had not disclosed a fact which should not have been suppressed. 15
Again, an insurance claim was successfully avoided due to a deliberate misrepresentation about
drinking habits and nondisclosure of a venereal disease by the insured.

7. Mitigation of Loss and Obligation to take Precautionary Measures:

In the event of some mishap to the insured property, the insured must take all necessary steps to
mitigate or minimize the loss, just what an ordinary prudent person would have done under those
circumstances in his or her own case. Though the insured is bound to do his or her best, he or she is
not bound to do so at the risk of his or her life.
Policies may also obligate the insured to undertake all reasonable precautionary measures in order
to prevent the loss from occurring or the peril damaging the property.

8. Condition Precedents to the Insured’s Right to Recover:

If policy provides that "it shall be a condition precedent to the insured's right to recover", it is for
the insurer to prove that the insured has not complied:
An insurance policy against loss of or damage to an airplane provided that it should be a condition
precedent for a claim under it that the pilot had observed all statutory regulations relating to air
navigation. The plane crashed and its owners claimed to be indemnified under the policy. Held, the
burden of proving that the pilot had not complied with the regulations was on the insurer.

9. Average Clause (Fire and Property Insurances):

14
Life Insurance Corporation v. Paravathavaradhani.
15
New India Assurance Company v. Raghva Reddi.

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In fire insurance policies, it is quite common to have an average clause by which the insured is
called upon to bear a portion of the loss himself or herself. The main object of this clause is to
check under-insurance (i.e. insuring the property at a sum lower than the actual valuation of the
property), to encourage full insurance, and to impress upon the property owners to get their property
accurately valued before insurance. In order to save premium, people generally under-insure their
property since it is rare that the entire property will be completely destroyed in case of fire. Also,
insuring a lower sum technically means that the insurer will fix a relatively lower premium, but due
to under-insurance the insurer would regardless have to pay the full extent of the loss even in case
of a partial damage to property resulting from a fire. Hence, to protect themselves against under-
insurance, the insurers insert an average clause in the policy, the effect of which is that the assured
can only recover such proportion of the actual loss suffered as the sum insured bears to the total
value of the insured property, which means that, if the insured only insures 2/3 rd of the total value of
the property then in case of the presence of an average clause the insurer will only pay 2/3 rd of the
total loss incurred by the insured and the rest 1/3rd would have to be borne by the insured himself or
herself.
The Average Formula:
Sum Insured
Amount that the Insured will recover = x Total Loss
Total Value of the Property

10. Assignment of Policies:

(a) Assignment of fire policies:
Assignment of fire policies is governed by the Sections 49 and 135 of the Transfer of Property Act,
1882:
Section 135: Assignment of rights under policy of insurance against fire:
Every assignee by endorsement or other writing, of a policy of insurance against fire, in
whom the property in the subject insured shall be absolutely vested at the date of the
assignment, shall have transferred and vested in him all rights of suit as if the contract
contained in the policy had been made with himself.
Since, fire insurance policies are personal contracts; they are not ordinarily assignable without the
prior consent of the insurer. Therefore, the benefit of insurance does not pass with the sale or
assignment of the property, but most policies contain a provision with respect to assignment of the
policy. A fire policy can be assigned either by endorsement on the policy itself or by a separate
deed of assignment, provided the insurer has been given notice of assignment.
However, in case of sale of immovable property, even though there may be no assignment of the
fire insurance policy, the transferee can nonetheless claim any payment that the transferor receives
from the insurer for any loss caused due to a fire occurring after the transfer or sale of the property.
Section 49: Transferee’s right under policy:
Where immoveable property is transferred for consideration, and such property or any part
thereof is at the date of the transfer insured against loss or damage by fire, the transferee, in

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case of such loss or damage, may, in the absence of a contract to the contrary, require any
money which the transferor actually receives under the policy, or so much thereof as may be
necessary, to be applied in reinstating the property.
When immovable property, which is insured against fire, is transferred, the transferee may require
to be paid to him any money which the transferor actually receives under the policy in case of
damage or loss of the property from fire.
(b) Assignment of life policies:
A policy of life assurance is assignable as 'actionable claim' and it can be assigned in any form as
long as it is clear. Such assignment may be made either by endorsement on the policy itself or be a
separate instrument. But, a written notice of the assignment must be given to the insurance office,
and the insurer must give a certificate acknowledging receipt of such notice. The assignee takes the
policy subject to all the equities (i.e., he can be met by any of the defences which would be
available against the assignor).

11. Nomination by Policy Holder:

Holder of a Life Insurance policy may, at the time when the policy is effected or at any time before
the policy becomes mature for payment, nominate the person(s) to whom the money (payable under
the policy) shell be paid in the event of the death of the insured. A nomination is either incorporated
in the policy itself or it is done by a subsequent application to the insurer who registers the same in
the records relating to the policy. Nomination made may be cancelled or altered at any time before
the policy become mature for payment by an endorsement or a further endorsement or by a Will of
the insured. A nomination shell be deemed to be cancelled where a transfer or assignment of the
policy takes place.
Also note, where the policy matures for payment during the life-time of the person whose life is
insured or where the nominee or, if there are more nominees than one, all the nominees die before
the policy matures for payment, the amount secured by the policy shell be payable to the policy-
holder or his heirs or legal representative or the holder of a succession certificate, as the case may
be.
Thus, X, a policyholder nominates Y as his nominee. Before the maturity of the policy Y dies. On
the maturity of the policy, Y's heirs claim the policy money from the company, the heirs of Y would
not be entitled to the sum payable under the policy as the nominee of the assured, X, died in his life
time. The amount as such is payable to X.
Thus, in short, in an assignment right, title and interest in the policy passes to the assignee in his
own right and for his own benefit, but in a nomination, the death of the person whose life is insured
entitles the insurer to hand over (for sake of convenience) the money payable under the policy of
the person named in the policy as the nominee; but such nominee is not entitled to the money in his
own right. He takes it only as a constructive trustee for the benefit of those entitled to the property
of the deceased. In the case of an assignment, the assignee can sue on the policy though not a party
to it; but in the case of a nomination, the nominee, as a rule, cannot sue on the policy, in any case at
least, during the lifetime of the policyholder.

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12. Subrogation:
The ‘Doctrine of Subrogation’ is a corollary to the principle of indemnity and not only applies to
fire and marine insurance. Subrogation is the substitution of one person in place of another, whether
as a creditor or as a possessor of any other rightful claim where he or she succeeds to the right of
that other person in relation to the claim, its rights, remedies or securities. According to it, when an
insured has received full indemnity in respect of his or her loss, all rights and remedies which he or
she has against third persons, will pass on to the insurer and will be exercised for the insurer’s
benefit until the insurer recoups the amount paid under the policy. It must be clarified here that the
insurer’s right of subrogation arises only when he or she has paid for the loss insured against under
the policy and this right extends only to the rights and remedies available to the insured in respect of
the thing to which the contract of insurance relates.
It is to be noted that the doctrine of subrogation further prevents the insured from making a profit
out of his or her insurance. This doctrine does not arise upon any of the terms of the contract of
insurance, but it has been adopted for the purpose of carrying out the fundamental rule of
indemnity, and it has been adopted solely for the purpose of preventing the insured from recovering
more than a full indemnity. Therefore, the right of subrogation does not apply to contracts of
insurance such as, life insurance, which are not contracts of indemnity.
A vessel owned by S.S. Navigation Co. collided with a vessel owned by the Shalimar Paints Co.
causing it to sink. The insurer indemnified Shalimar Paints Co. and took a Deed of Subrogation and
sued the S.S. Navigation Co. for recovery of damages more than 3 years after the collision. The
court held in that the insurer cannot claim better rights or remedies than that which was available to
the insured.16 The court observed that the insurer merely ‘steps into the shoes of the insured’.
Again, earlier in it was held that even if the insured recovers more from the third party the insurers
by claim of subrogation cannot claim all of that amount, insurer’s right is limited to the repayment
of only the amount paid by them. 17 The right of subrogation is not merely confined to cash
payments, but also to the value of all the benefits received by the insured other than cash. The
consequences of principle of subrogation are as follows:
(a) After the payment of policy money, the insurers are entitled to all the rights and remedies which
may be possessed by the insured in respect of the subject-matter of insurance.
(b) The insurers are entitled to deduct from the amount payable under the policy, any sums received
by the insured before the payment of the insurance money either by way of salvage or from third
persons in respect of the subject-matter of insurance.
(c) If the insurers have paid the insurance money, and then the insured receives any sum by way of
salvage money, or otherwise, from third person in respect of the subject-matter of insurance, the
insured must account for such sums to the insurer. For example, the plaintiff whose motorcar had
been damaged due to the defendant’s negligence, recovered a sum less than the whole amount of
damages sustained from his or her insurance company, who requested the plaintiff not to make any

16
National Insurance Co. v. S.S. Navigation Co., AIR 1988 Cal. 168.
17
Yorkshire Insurance Co. v. Nisbet Shipping Co., 1962 2 Q.B. 330.

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claim against the defendant, nevertheless, the plaintiff brought an action for tort and recovered from
the defendant the full amount of damage. It was held that the request of the plaintiff’s insurers did
not prevent him from recovering, but that he could hold the amount to the extent of the sum
received from his insurer’s as trustee for them, they being subrogated to his rights.
(d) Where the amount received from the insurers is insufficient to indemnify the insured, by reason
of his or her being under insured, the right of subrogation is subject to the right of the insured to
receive a full indemnity and insurer’s claim only arises after the loss of the insured has been fully
satisfied. Re-insurers are entitled to all the rights of the original insurers, including the rights of the
insured to which the original insurers are subrogated.18

13. Contribution:
Contribution is a matter which arises between two different insurers who have undertaken the same
risk and the assured is affected by it only indirectly. The principle, or rather the rule of practice,
depends upon the doctrine that a person who insures his or her interest in property against loss by
fire or some other event, whether that interest be that of a proprietor or of a creditor, cannot recover
from the insurance company a greater amount than that which he or she has lost due to the
contingency insured against. So, in the case of double insurance of the same interest with different
insurance companies, the insured will not be entitled to recover more than the full amount of the
loss which he or she has suffered.19 However, from a lawyer’s point of view, contribution is of little
practical importance, for questions relating to it are settled by mutual arrangements between the
insurers in accordance with their own set of rules. Thus, where there are two or more insurances on
one risk, the principle of contribution comes into play. The aim of contribution is to distribute the
actual amount of loss among the different insurers who are liable for the same risk under different
polices in respect of the same subject matter.
In law there is nothing to prevent a person from effecting two or more insurance in respect of the
same subject matter, but the principle of indemnity will come into operation to prevent the recovery
of more than the ‘actual loss’ even if the total amount of insurance far exceeds the loss. The practice
of contribution is resorted to for the purpose of apportioning the amount recoverable, amongst the
different set of insurers in order to prevent the loss being borne in an undue proportion by any one
of them.
Generally, there is a contribution clause in the policy which provides that if at the time of the loss or
damage, there are other insurances in existence covering the same subject matter of insurance, with
other insurers, the liability of the insurers under the policy in question is limited to their rateable
proportion of loss or damage. The insured, under such a policy cannot demand payment in full from
the insurer in question, but only the proportion for which they are liable after all the policies
subsisting at the time of the loss have been taken into consideration. But when the policy does not
contain the contribution clause the assured is entitled to recover the full amount from any set of
insurers, and he or she cannot be referred to other insurance companies for relief. After payment in

18
Assi Curazioni Etc. v. Empress Assurance Corporation, 1907 2 K.B. 814.
19
Castellain v. Preston, 1883 Q.B.D 380.

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full the insurer can call upon the other offices insuring the risk to contribute their share of the loss.
This right of insurers to demand contribution inter se is not contractual but is based on the
principles of natural justice.20 For example, contribution clause limiting the liability of the insurer,
usually runs as follows: “If at time of any loss or damage happening to any property hereby insured,
there be any other subsisting insurance, whether affected by the insured or by any other person,
covering the same property, this company shall not be liable to pay or contribute more than its
rateable proportion of such loss or damage.”
Double Insurance:
It takes place when the assured makes two or more insurance’s on the same subject-matter, the
same risk and the same interest.
A merchant expecting a consignment of goods from aboard and being ignorant of their real value
insures them for an amount which he subsequently finds to be inadequate to cover their full value
and, on that ground, may affect a further insurance on the same goods.
Double insurance is not prohibited by law, and in the absence of any fraudulent intent the assured
can recover on all the policies till his total loss has been made up. If, however, it turns out that the
whole amount insured is in excess of the value of the interest at risk, this is said to be an “over
insurance.” In case of double insurance the assured cannot recover more than an indemnity, that is
more than the real or the declared value of the subject matter insured under all the polices put
together in case of over insurance the affected sets of polices are considered as making but one
insurance and are good to the extent to the value put in risk, and the assured can recover on the
different polices no more than there value. The assured, however, may sue on whichever policy he
likes, and recover on it to the full extent of his loss living the underwriter on that policy to adjust his
claim the recovering rateable sum by way of contribution from the underwriters on the other
policies.

14. Reinsurance:
When insurers find that they have entered into a contract of insurance which is an expensive
proposition for them or if they wish to minimize the chances of any possible loss, without, at the
same time, giving up the contract, resort is had to a device called reinsurance. A contract of re-
insurance is a contract by which in consideration of a certain premium, the original insurer throws
upon another the risk for which he had made himself responsible to the original assured to whom,
however, who alone remains liable on the original insurance. An underwriter who has accepted risk
may reinsure the whole or part of the risk with another underwriter, either because he finds that he
has undertaken a risk on imprudent terms or bound himself to a greater amount of risk than he may
be able to discharge. The ‘subject matter of insurance’ must be the thing originally insured, and in
this subject - matter the insuring underwriter must have an insurable interest to the extent of the
liability which he has incurred upon the first contract of insurance. Thus, under a contract of re-
insurance the reassured are insured not against direct loss occasioned by the happening of the event
insured against but against liability which they have undertaken under their own contract of

20
Godin v. London Assurance Co., 1758 97 E.R.

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insurance with the assured. The re insurer as a rule, undertakes to be liable with regard to the
original policy, “subject to the same clauses and conditions as the original policy”.
A contract of insurance and a contract of re-insurance are independent of each other. If the original
contract of insurance falls through on account of lack of insurable interest, there cannot be a
contract of re-insurance; and if there is one, it must fall through also, although the practice in
England is for the solvent re-insurance offices to pay for the losses even under void policies (Ref:
London County Commercial Reinsurance Office). Insurable interest is at once the basis of and the
connecting link between the original contract and the contract of re-insurance. The insurer has an
insurable interest in the risk and may reinsure in respect of it. But the original assured has no
interest or right in respect of such re-insurance. In general, the contract of re insurance is totally of
distinct and a separate contract from the original insurance. The original assured has no claim
against the re-insurer as there is no privately of contract between them. The reassured remains
solely liable on the original insurance and he alone has any claim against the re-insurer.
Reinsurance is only a modification of the contract of insurance and as such, within the powers of a
company authorized to make a contract of insurance. So, power to effect reinsurance, need not be
specifically mentioned in the Memorandum of Association of an Insurance Company (having power
to effect insurance). Re-insurance is, in fact, insurance by the original insurer of his interest in the
risk created by his own contract to insure.
It has sometimes been doubted whether a contract of re-insurance is a contract of indemnity or not.
(Mathew, L.J. in Nelson v. Empress Assurance Corporation Ltd.) This view was subsequently
followed in Clower Clayton and Co. v. Hessler and Co., but was expressly dissented from in British
Dominions General Insurance Co. Ltd. v. Dudar, where the principle of indemnity in the case of a
contract of re-insurance was not recognized. Moreover, this seems to be the solitary judgment on
the point and, therefore, cannot be regarded as laying the correct law, because the liability of the
insurer is shifted to the re-insurance and because the latter’s liability is contingent upon the former;
it is but obvious that the contract of reinsurance should be regarded as a contract indemnity.

15. Different Sub-types of Insurance Policies:

The following are the main types of fire insurance policies:
1. Specific Policy:
It is a policy which covers the loss only up to a specific amount which is called the loss value of the
property. Specific policies are cases where under-insurance is prevalent, hence, to protect against
which insurers generally insert an average clause into the policy, and thereafter, it is known as
Average Policy.
2. Comprehensive Policy:
It is also known as an ‘all in one’ policy and covers risks like fire, theft, burglary, third party risks,
etc. It may also cover loss of profits during the period the business remains closed as a result of the
fire. Therefore, it is also known as a ‘Consequential Loss Policy’.
3. Valued Policy:

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A fire policy is a contract of indemnity. But a departure from this may be made in the case of a
‘valued policy’, under which the insured can recover only a fixed amount agreed to at the time the
policy is accepted. In the event of loss, only the fixed amount is payable, irrespective of the actual
amount of loss.
4. Floating Policy:
The policy which covers loss by fire caused to property located at different places is known as a
floating policy. For instance, such a policy might cover goods lying in two warehouses at two
different locations. This type of fire policy is always subject to an average clause.
5. Replacement or Reinstatement Policy:
In this kind of fire insurance policy, to prevent the use of any fraudulent devices by the assured, the
insurer inserts a re-instatement clause, whereby he undertakes to pay the cost of replacement of the
property damaged or destroyed by fire. Therefore, he may re-instate or replace the property instead
of paying cash to the insured. In such a policy, the insurer has to select one of the two alternatives,
i.e. either to pay cash or to replace the property, and afterwards he cannot change to the other
option.

Marine insurance policies though commonly in one form, are of different kinds and are known by
different names. They are:
(a) Valued Policy:
A valued policy is one which specifies an agreed value of the subject-matter insured.
(b) Unvalued Policy:
An unvalued policy is one which does not specify the value of the subject-matter insured and
subject to the limit of the sum insured, leaves the insurable interest to be subsequently ascertained
and proved.
(c) Voyage Policy:
A voyage policy is one in which the limits of the risk are defined by the determination of places the
subject-matter of insurance being insured of particular voyage.
(d) Time Policy:
A time policy is one which expresses the insurance as being for a specified period of time.
(e) Mixed policy:
A mixed policy is one in which a contract for both voyage and time may be included, for example,
Karachi to Liver pool for 9 months.
(f) Floating Policy:
A floating policy is one in which the name of any vessel is inserted, the policy being stated to attach
to "ships" to be declared for specified voyage. The name of the ship and other particulars are
subsequently declared by an endorsement on the policy.

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