Key Principles of Insurance

Contracts

Distinct/Specific Characteristics of insurance contracts

❖ Whereas all contracts share basic concepts and basic elements,

insurance contracts typically possess a number of distinct legal

characteristics that make them different from other legal contracts
❖ The common special characteristics of insurance contracts

include:
1. adhesion,
2. Unilateral,
3. Conditional,
4. Aleatory and
5. personal in nature - with exception of life insurance and some
maritime insurance policies
 1- Contract of adhesion

❖ In insurance, policies are contracts of adhesion drafted by

insurers and sold on a ‘take-it-or-leave-it’ basis.

❖ One party draws up its terms (provisions) and represents it to the

other party without negotiation, revising or deleting any
provision.

❖ Insurance company writes the contract and the insured either

accept it or reject it.
 2- Unilateral contract

❖ A contract may either be bilateral or unilateral.

❖ In a bilateral contract parties exchange promises .
❖ In a unilateral contract, the promise of one party is exchange for
a specific act of the other party.
❖ Insurance contracts are unilateral, that is, insurance company
makes a legally enforceable promise to pay indemnity.
❖ The insured makes no promises that can be legally enforced and
the insured is duty bound to pay the premiums or to comply with
the policy provisions.
 3- conditional contract

❖ A condition is a provision of a contract that limits the rights

provided by the contract.
❖ Insurance contracts are conditional, that is, the insurance
company's obligation to pay a claim depends on whether the
insured or the beneficiary has complied with all policy conditions
e.g if a loss is suffered, certain conditions must be met before the
contract can be legally enforced and the insured or beneficiary
should satisfy these conditions and prove that he/she has an
insurable interest in the person insured or property insured.
 4- Aleatory contract

❖ This is an agreement that is concerned with an uncertain event

that provides for an unequal transfer of value between the parties
❖ So, if one party to a contract receives considerably more in value
than he/she gives up under the terms of the contract, it is called
an aleatory contract
❖ Performance of the obligation of both parties depends upon a
future event
❖ The uncertain event should be beyond the control of either party
 5-Personal contract

❖ Insurance contract is considered a personal contract because it

indemnifies the insured against loss of property

❖ However, life insurance and some maritime insurance policies are

notable exceptions. That is a life insurance policy can be freely
assigned to another person without the insurer's consent because
this may not change the risk or increase the probability of death.
 Principles of Insurance Contract

6. Principle of Utmost Good Faith

❖ In ordinary contracts, the parties have no duty to provide any
information to the other side, that is, each side must look out for
its own interests, and the principle of ‘‘let the buyer beware’’ (or
caveat emptor) applies.
❖ By contrast, parties in insurance contracts are required to disclose
all facts which are material to the policy arrangement
❖ This requirement is usually described as a ‘‘duty of utmost good
faith’’ (Latin expression, uberrimae fidei). Hence contracts of
insurance are commonly referred to as contracts uberrimae fidei;
contracts of utmost good faith in which full and honest disclosure
of material facts is obligatory.
 Principles of Insurance
Contract

▪ The duty of disclosure in insurance is voluntary. It

was first explained by Lord Mansfield in Carter v
Boehm (1766) Bun 1905.
* Lord Mansfield stated that the Insurer trusts
the insured not to keep anything in his knowledge because
he has monopoly of knowledge with respect to subject
matter and that good faith forbids any party to conceal
what he knows to the other in the contract.
Principles of Insurance
Contract

The underwriter trusts to his representation and

proceeds upon confidence that he does not keep
back any circumstance in his knowledge to mislead
the underwriter into a belief that the circumstance
does not exist and to induce him to estimate the risk
as it did not exist. The keeping back such a
circumstance is fraud and therefore the policy is
voidable.
 Principles of Insurance
Contract

▪ Words to the same effect were expressed by Jessel

MR in London Assurance Co Ltd v Mansel (1879)
11 Ch D 363
“The first question to be decided is, what is the
principle on which the Court acts in setting aside
contracts of assurance? As regards the general
principle I am not prepared to lay down the law as
making any difference in substance between one
contract of assurance or the other……..I take it
good faith is required in all cases…..”
 Principles of Insurance
Contract

* In London Assurance Company –vs-

Mansel (1879) - when responding to a
question in the proposal form, the
proposer stated that no other insurer had
declined to take his risk while in fact two
companies had previously declined to
insure him.
 Principles of Insurance
Contract

* Subsequently, the insurer sought to avoid the

contract on the ground of nondisclosure of a
material fact. It was held that the contract was
voidable at the option of the insurer for the
concealment of material fact. A similar holding
was
made in Horne –vs- Poland (1922).
 Principles of Insurance
Contract

See also in Joel vs. Law Union and Crown Ins.

Co (1907) 2 KB 863. Fletcher Moulton observed
: Joel vs. Law Union and Crown Ins. Co (1907) 2 KB
863
In this case Fletcher Moulton observed “ In policies
of insurance whether marine insurance or life
insurance, there is an understanding that the contract
is uberrima fides, that is, if you know…
 Principles of Insurance
Contract

any circumstance at all that may influence the

underwriter’s opinion as to the risk he is incurring,
and consequently as to whether he will take it, or
what premium he will charge, if he does take it , you
will state what you know. There is an obligation
there to disclose what you know, and the
concealment of a material circumstance known to
you, whether you thought it material or not, avoids
the policy.” The test of what is material is that of
a…
 Principles of Insurance
Contract

…reasonable person and hence an objective test.

▪ Cases decided after Carter vs Boehm appeared to
place a heavier duty of disclosure on the insured. In
the words of Cockburn CJ in Bates vs Hewett
(1867) LR 2QB 595:
“No proposition of insurance law can be better
established than this: that the party proposing the
insurance is abound to communicate…
 Principles of Insurance
Contract

to the insurer all matters which will enable him to

determine the extent of the risk against which he
undertakes to guarantee the insured.” An
exception to the rule of disclosure is that where
both parties have equal knowledge of the facts,
then neither party will be liable for non-disclosure.
 Principles of Insurance
Contract

In Bates –vs- Hewitt [ibid] – the plaintiff took a policy on

a war ship at a time when both insurer and insured knew
the ship to be a war ship. Plaintiff (insured) did not
disclose this to insurer expressly and when the ship was
destroyed at sea the insurer disclaimed liability basing it on
doctrine of non-disclosure.
Held: As both parties had known that the ship was a war
ship the insured had no duty to disclose.
 Principles of Insurance
Contract

* Read the following cases: London General Omnibus

vs Holloway (1912) 2KB 72L; Banque Keyser Ullman
SA vs. Skandia (UK) Ins Co and others (1987) 2 AII
ER 923;
MATERIALITY
▪ Courts have devised two tests of determining whether a
fact is material or not:
1. Reasonable Insured Test: In Horne vs. Poland
(1922) 2 KB 364
 Principles of Insurance
Contract

In Horne vs. Poland (1922) 2 KB 364:

it was stated that if a reasonable man
would know that the underwriter would be
influenced in deciding the premiums and
whether to accept the risk, and the fact that
they were kept ignorant of it was fatal.
 Principles of Insurance
Contract

The plaintiff was making a contract

of insurance and if he fails to disclose
what a reasonable man would, he
must suffer the same consequences as
any person who makes a similar
contract.
 Principles of Insurance
Contract

2. Prudent Insurer Test

• Section 18 (2) of the Marine Insurance Act
provides a circumstance is material if it would
influence the judgment of a prudent insurer in
fixing the premium or determining whether he
will take the risk.
 Principles of Insurance
Contract

Disclosure by assured. s18(1) Subject to this

section, the assured disclose to the insurer, before
the contract is concluded, every material
circumstance which is known to the assured, and
the assured is deemed to know every circumstance
which, in the ordinary course of business, ought to
be known by him; and, if the assured fails to make
such disclosure, the insurer may avoid the
contract.
 Principles of Insurance
Contract

A circumstance is material if it would influence the

judgment of a prudent insurer in fixing the premium,
or determining whether he will take the risk.
(3) In the absence of inquiry, the following
circumstances need not be disclosed.
a) Any circumstance which diminishes the risk;
b) Any circumstance which is known or presumed to be
known to the insurer; and the insurer is presumed to
know matters of common notoriety or …
 Principles of Insurance
Contract

knowledge, and matters which an insurer in the ordinary

course of his business, as such, ought to know;
c) Any circumstance as to which information is waived by
the insurer;
c) Any circumstance which is it superfluous to disclose by
reason of any express or implied warranty.
 Principles of Insurance
Contract

Whether any particular circumstance, which is not

disclosed, is material or not, in each case, is a question
of fact.
(5) In this section “circumstance” includes any
communication made to, or information received by,
the insured.
 Principles of Insurance
Contract

▪ In Associated Oil Carriers Ltd vs. Union

Insurance Society Of Canton Ltd. Lord Atkin said:
▪ The court of appeal held that a fact is material if
a prudent insurer would have treated it as
increasing the risk even though he might have
rejected the risk or charged a higher premium.
 Principles of Insurance
Contract

TIME DISCLOSURE:
▪ The duty to disclose exists throughout the negotiation
period.
▪ Material facts coming to the knowledge of the parties
thereafter need not be disclosed, Lord Bramwell in
Lishman vs Northern Maritime Insurance. Co
(1875) LR 179
Lishman vs Northern Maritime Insurance. Co (1875) LR
179
“The time up to which it must be disclosed is the
time when the contract is concluded. Any material
facts that come to his knowledge or ought to have
come to his knowledge before the contract is
finally sealed must be disclosed to the insurer if
the contract must still go on”
 Principles of Insurance
Contract

The duty of disclosure continues throughout the

negotiations until at least the contract has been
completed by acceptance see Whitewell vs Auto
Car Fire and Accident Ins. Co (1977) Lloyds Rep
41Whitewell vs Auto Car Fire and Accident Ins.
Co (1977) Lloyds Rep 41
In a proposal form for motor insurance…
 Principles of Insurance
Contract

there was a question which asked the proposer

whether any insurance company declined his
insurance, he gave the answer No. This was in
fact a true statement at the time at which he
made it. But in fact, quite unknown to him, two
days before the proposal was accepted another
insurance company had declined to insure him.
 Principles of Insurance
Contract

It was held there was no duty to disclose the fact

afterwards because the contract was concluded
and the proposal was accepted.
• In rare circumstances the insurer may extend the
duty of disclosure by subjecting it to payment of
premium. The effect of such a clause is that the
period during which has duty to disclose exists is
enlarged so that any material fact …
 Principles of Insurance
Contract

…coming to the knowledge of the insured must be

disclosed right up to the moment that the first
premium is paid. See Looker and Another vs Law
Union and Rock Insurance Co (1928) 1 KB 354.
In a proposal for life insurance the proposer in
answer to a question. “Are you now free from
disease ailment? Said “Yes”. Five days later the
insurance company sent a …
 Principles of Insurance
Contract

…conditional acceptance of the risk stating that

“If the health of the life proposal remains
meanwhile unaffected, the policy will be issued on
the payment of the first premium. The risk of the
Company will not commence until receipt of the
first premium”. Five days after the receipt of this
letter he become ill and died 4 days from
pneumonia, but no notice of illness …
 Principles of Insurance
Contract

▪ …was given to the company. He sent the

company a cheque for the first premium but was
dishonored on presentation. It was held that the
insurance company was not bound to issue a
policy. The insurer may also insist that the duty
to disclose will subsist up to the date of issue of
the policy. In such a case the duty of disclosure
will last longer.
 Principles of Insurance
Contract

*In Allis Chalmers –vs- Maryland Fidelity and

Deposit Co. ltd [1960] 114 LT – a fidelity policy
was taken to commence from the date of its
issuance. It had been taken out to cover loss by
embezzling by servant. Servant left before the
policy was delivered, having stolen from the
plaintiff.
 Principles of Insurance
Contract

*Plaintiff did not inform the insurer but

paid premiums. When he laid claim,
his claim was resisted. Held: it fails on
account of non-disclosure of employee
having left the plaintiff.
 Principles of Insurance
Contract

*The rationalization of doctrine of

non-disclosure appears to be that the
insured has monopoly of knowledge- the
contemporary questions one would like to
ask himself are; would this stand today?
 Principles of Insurance
Contract

*Should we hold an insured liable for things he

did not have knowledge? Why should the
insurance company know them anyway? What
reforms should we suggest on the doctrine of
non-disclosure? Caveat emptor -no
liability for innocent non-disclosure – should it be
applicable?
 Principle of Utmost Good Faith…

How does it manifest?

❖ Under the Principle of Utmost Good Faith, each party is required
to communicate the terms and conditions in a non-ambiguous
manner to the other.
❖ This principle requires both parties to be transparent toward each
other.
❖ If the insured fails to disclose the material facts during the
formation of the contract, the insurance contract will be voidable
at the option of the insurer.
❖ The same goes for the insurer, as they are also obligated to be
clear on all terms and conditions of the insurance contract.
 Principle of Utmost Good Faith…

❖ The duty of utmost good faith is implemented through the legal

doctrines of representation, concealment, and warranty.

•Utmost good faith

•Representation
•Concealment
•Warranty
 Principle of Utmost Good Faith…

Representation
❖ It is a statement made by an applicant for the insurance to supply
information to the insurance company to induce it to accept a risk.
❖ Representations may be written application or oral.
❖ If an applicant misrepresents a material fact, the insurance
contract can be avoidable and the insured will have no coverage
even though he/she has an insurance policy.
❖ In the case of Pan Atlantic v Pine Top (1994) 3 All ER 581, the
House of Lords held that the insurer would be entitled to avoid
the contract if the misrepresentation or non-disclosure was
material. Sukinder Singh Jutley v Prudential Assurance &
Another (2007) eKLR (Kenyan position with regard to fraudulent
claims was no different from that in England).
 Principle of Utmost Good Faith…

Concealment

❖ This is the deliberate failure of an applicant for

insurance to disclose a material fact to the insurance
company .

❖ If an applicant intentionally concealed a material fact,

that he/she is obviously aware of its relevance to the
insurance contract, the insurance company will have
the right to void the contract
 Principle of Utmost Good Faith…

Warranty
❖ This is a policy provision or a promise made by the insured
making the insurer's responsibility conditional upon some fact or
circumstance concerning the risk.
❖ A warranty may be expressed or implied.
❖ Express warranties are expressly incorporated in the policy.
❖ Implied warranties are presumed to be present in the contract
document.
 EFFECT OF
NON-DISCLOSURE

▪ The non-disclosure of a material fact by either

parties renders the contract voidable at the option of
the innocent party. London Assurance Co Ltd vs.
Mansel, and Horne vs Poland.
▪ As enunciated in Carter vs Boehn the doctrine of
disclosure appeared fair to both parties in that
certain facts may be peculiarly be in the knowledge
of one party.
▪ However subsequent developments placed a heavier
burden on the insured on the assumption that he has
a monopoly of knowledge in relation to the subject
matter.
▪ During the mercantile era the doctrine was justified
in the proposer knew everything about the subject
matter while the insurer knew nothing.
 7. Principle of insurable interest

❖ This describes the relationship between the insured and subject

matter of insurance (exposure unit i.e. the person in life
insurance, the property in property insurance)
❖ The party to the insurance contract who is the insured or
policyholder has a particular relationship with the subject matter
of the insurance whether that be “a life or property or liability”
to which he might be exposed.
❖ A person or an insured is said to have an insurable interest in the
subject if any destruction of the subject adversely affects the
insured.
 Principle of insurable interest…

❖ The interest should be a right in property or a right arising out of

contract in relation to property
See definitions given by:
❖ Lawrence J in Lucena Vs. Crawford 1806 2 BOS PNR 269 at
302
❖ Feasey v. Sun Life Insurance of Canada [2003] Lloyd’s Rep.
IR 637
❖ Lion of Kenya Insurance Company Limited v Edwin Kibuba
Kihonge [2018] eKLR
❖ Section 5 of the Marine Act, Cap. 390 Laws of Kenya
 Principle of insurable interest…

The rationale for insurable interest

❖ To prevent Gambling/Wagering Without an insurable interest, the
insurance contract would be a gambling contract, so it is the
characteristic of an insurable interest that distinguishes an
insurance contract from wagering contracts (the ‘anti-wagering
rationale’) .
❖ An insurable interest is thought to reduce the moral hazard posed
by the insured taking deliberate steps to destroy the insured
subject matter to benefit from a claim’s payment (the ‘moral
hazard rationale’) and
❖ The doctrine of insurable interest supports the indemnity
principle which rests upon the policy that claims payments
should be limited to an indemnity for the insured’s loss.
* It establishes a nexus between the insured and the
subject matter in that the insured starts to suffer
prejudice in the event loss or destruction of the
subject matter.
* It confers upon the insured the requisite locus
standi to sue on the policy. Cosford Union and
Others vs. Poor Law and Local Government
Officers Mutual Guarantee Asso. Ltd (1910)
103 LR 463
* It is argued that insurable interest had been used by
insurers as profit maximization devise.
 Principle of insurable interest…

Existence of insurable interest

The time at which insurable interest must exist depends upon the
type of insurance. For example;
❖ In life insurance: The insurable interest must exist only at the
inception of the policy, but it does not have to prevail at the time
of a loss.
❖ In property insurance: The insurable interest must exist at the
time of the loss. That is, insurable interest does not have to exist
when the coverage is put into effect.
 Principle of insurable interest…

Courts have applied the following rules as the determinants of

insurable interest
a) Existence of any direct relationship between the insured and the
subject matter.
b) The relationship must have arisen out of a legal or equitable
right or interest in the subject matter.
c) The interest bears any loss or liability arising in the event the
loss or risk attaches.
d) The insured’s right or interest in the subject matter must be
capable of pecuniary estimation or quantification.
Who has an insurable interest?
▪ See Insurance Co Ltd vs. Stimson (1888) 103
US 25 471:Where a contractor insured a hotel
after its completion but before handing it over to
the owner and the building was subsequently
destroyed by fire before the policy lapsed. It was
held that the contractor had an insurable interest
by virtue of the mechanic’s lien.
▪ Contrast however with Stockdale vs Dunlop:
where the plaintiff had insured the value and
profit of palm oil he had verbally agreed to buy
from a company while the ships were on the
high seas but one went missing. A claim for
indemnity failed as the insured had no insurable
interest in the oil.
 A similar holding was made in Macaura vs Northern
Assurance Co. Ltd [1925] AC 69 (discussed earlier )
where the insured had taken out a policy over the
company’s timber.
▪ In Thomas vs Continental Creditors Ltd (1976)
AC 346 :It was held inter alia that a creditor had
an insurable interest in the life of a debtor to the
extent of the debt.
 In Hebdon vs West [1863] 3 B and C 579 : It was
held that an employer has an insurable interest in the
life of an employee to the extent of the services
rendered. In addition, an employee has an insurance
interesting the life of the employer to the extent of their
relationship.
▪ In Griffith vs Flemming (1909) 1 KB 805:
It was held that a husband has an insurable interest in
the life of his wife and vice versa.
▪ See also in Sat Dev Sharma vs The Home
Insurance Co of New York (1966) EA 8 :
It was wrongly held that the proprietor of a
driving school had no insurable interest in the
life of his instructors.
▪ In Harse vs Pearl Life Insurance Co (1904) 1
KB 558
Harse vs Pearl Life Insurance Co (1904) 1 KB
558 - an insurance agent induced the plaintiff to
insure his mother’s life stating his interest in that
life being “the potential funeral expenses”. The
insurance company rejected the proposal on
account of there being no insurable interest.
He then claimed a refund of the premiums paid. Held:
the policy having been void for want of insurable interest
the plaintiff could not recover those premiums unless he
proved that the parties were not in pari delicto and since
the requirement of insurable interest is a requirement
of law, ignorance of the law will neither be a defence nor
a sword in the hands of the plaintiff.
Since they didn’t show he wasn’t in pari delicto with the
insurance company he could not recover.
In Worthington –vs- Churtis (1875) 1 ChD 419, - George
Churtis took out a life assurance policy valued at £500 in
the life of his son George Churtis Junior. The son
however died intestate while having some debts.
The issue was whether it was his estate which was
entitled to the money or the father who had taken out the
policy.
The insurance company honourably paid the proceeds of
the policy in court. Held:-although there was no
insurable interest by the father in the life of the son
measurable in monetary terms, the father was entitled as
between him and the estate of the son to receive the
money since he was the one who took it out.
In Hughes –vs- Liverpool Victoria Legal
Friendly Society (1916) 2KB - the plaintiff took a
policy of non-repayment of loans by his debtors
after being induced by insurance agents. The
agents left the employment of the defendant and
a new agent advised the plaintiff that the
insurance policies were void for want of
insurable interest for him as creditor for life*.
 He claimed refund of premiums and the company
refused arguing that the policy was void ab initio. The
trial court rejected the claim. On appeal the court held
the appellant’s claim should succeed as he had been
induced to insure a life of which he had no insurable
interest by an agent who had deceived him and hence the
appellant and the agent were not necessarily in pari
delicto.
▪ Section 7 to 15 of the Marine Insurance Act,
CAP 391 and Section 94 (2) of the Insurance
Act set out circumstances in which persons have
insurance interest in the subject matter.
Insurable Interest is essential for all policies.
• 94. (1) Subject to this Act, no policy of
insurance shall be issued on the life or lives of
any person or persons,…
* …or on any other event or events whatsoever,
wherein the persons for whose use, benefit or
on whose account such policy or policies shall
be made, shall have no insurable interest.
• An Insurable interest shall be deemed to be had
by:-
a) A parent of a child under eighteen years of age, or
a person in loco parentis of such a child, in the life
of the child to the extent of funeral expenses which
may be incurred by him on the death of the child;
b) A husband, in the life of his wife;
c) A wife, in the life of her husband;
d)Any person, in the life of another upon whom he is
wholly or in part dependent for support or education;
e) A corporation or other person, in the life of an
officer or employee thereof; and
f) A person who has a pecuniary interest in the
duration of the life of another person, in the life of that
person.
• A child’s advancement policy effected either
before, on, or after the appointed date shall not
be void by reason only that the person effecting
the policy had not at the time the policy was
effected an insurable interest in the life of the
child.
▪ Read the following cases: Newbury
International Ltd vs. Reliance Naiornal (UK)
(1994) 1 Lloyds Rep. 83: Fuji Finance Inc vs.
Aetna life Insurance (1997) Ch 173; Glengate
vs. Norwich Union Ins. Society (1996) 1 Lloyds
278; Colonial Mutual General Ins vs. ANZ
(1995) 1 WLR 1140
 NATURE OF
INSURABLE INTEREST

▪ As a general rule the insured is not obliged to

declare the nature or extent of the insurable
interest in the subject matter.
▪ Section 26 (2) of the Marine Insurance Act
provides that the nature and extent of the
interest of the assured in the subject matter
insured need not be specified in the policy.
▪ This is because insurers are generally more
concerned with the sums payable or indemnity
under the policy.
▪ However a description of the nature and extent
of insurable interest is necessary:
1. Where the proposal form contain a stipulation to
that effect.
 2. Where the subject matter of the insurance includes
prospective profits or consequential loss
3. Where the subject matter involves precarious loss.
• The insured must have an insurable interest in
the subject matter at one point or another.
1. In indemnity contract, e.g. marine, burglary, etc
insurance interest must exist when risks attaches.
Section 61 of the Marine Insurance Act embody
this rule. See Stockdale v Dunlop.
2. In life insurance the insured must furnish insurable
interest when the contract is entered into.
It was so held in Dalby vs India and London life
Assurance Co. (1854) 15 CB 365

* In statutory policies the insured must have insurable

interest at the time stipulated by the statute. For
example, in third party motor insurance the insured
must have an insurable interest when loss occurs.
 8. Principle of Proximate Cause

❖ This is the nearest cause or direct cause that results in a loss.

❖ It is the efficient or dominant cause that results in a loss with no
other intervening cause, which breaks the chain of events.
❖ The insurer is only liable for the losses when they are
proximately caused by the perils stated in the insurance policy.
❖ When an insured face a loss that occurred because of two or more
causes, then the most dominant and effective cause is the
proximate cause.
❖ The insurer is not liable for any loss caused by an uninsured
peril or cause.
 Principle of Proximate Cause…

Determination of Proximate Cause

The insurer is liable to pay indemnity,

a) When an insured risk is a single event .
b) When the insured risk occurs first and it is followed by an
excluded risk.
* The proximate cause of an event is the cause to which
the event is attributable. It is the cause which is more
dominant, direct, operative and efficient in giving rise
to the event.
* Courts have not developed any technical test of
ascertaining what the proximate cause of an event is.
* They rely on common place tests of the reasonable
man and that among competing causes, one must be
more dominant than the rest. The proximate cause need
not be the last cause in the chain of causation the
reason being that causation is not a chain but a net.
There are causes from all over asserting themselves at
different moments until the event occurs.
* If it were chain any break in the chain would stop the
causation or break the chain of events.
* In Leyland Shipping Company –vs- Norwich Union
Fire Insurance Society Limited- a ship was insured
against perils of the sea but policy exempted claims
from loss due to war or hostilities.
* While the ship was at the sea it was foreboded and had
to be anchored at a berth nearby. When later
transferred to another berth wind came and water
percolated the ship and sunk it. The issue was, what
was the cause of destruction of the ship – was it
foreboding or tides?
* Held: The proximate cause was foreboding of the ship
by German submarine which was at war and the
insurance was not liable. The court observed that the
chain of causation is a handy occupation but the figure
in adequate causation is not a chain but a net and each
point influences forces and events precedent and
simultaneously meet and radiation from each point
extends indefinitely.
* At the point where these influences meet it is for
judgment upon a matter of fact to declare which of the
causes was proximate and which was remote cause.
The cause which is truly proximate is that which is
proximate in efficiency.
* That efficiency may be preserved although other
causes may have sprung up which have not yet been
destroyed and may culminate in a result of which it
still remains the real efficient cause to which the event
can be ascribed.
* In Lawrence –vs- Accidental Insurance Company -
where plaintiff was insured against injuries or external
violence attaching otherwise than by epileptic fit or
disease etc.
* Lawrence while standing at a railway platform had an
epileptic fit and fell on the railway line. He was
crushed by a moving train and sustained fatal injuries.
The issue was whether the injuries sustained were due
to epileptic fit or disease
* duly exempted?
* Held: Estate of Lawrence had to recover and William
–J- observed:
* “It were infinite for law to charge causes of cause and
their impulsions on one another. Therefore it contented
to immediate cause and charges of acts by that without
looking any further degree.
* Therefore I say according to the true principle of law
we must look at immediate and proximate cause of
death and seems impracticable to go back to path of a
person for if he was not born the accident would not
have occurred.”
* In Jupiter General Insurance Company Limited –vs-
Rajab Hassan and Sons Ltd (1960) EA 597 - the
applicant was the insurer of motor vehicle owned by
the respondent. The policy excluded claims arising
from loss due to drunken driving. The vehicle was
given to an authorised employee driver of the
respondent to take it to a garage in Tanga but instead
went to Morogoro where he drunk and got an accident.
* The policy had insured against loss from malicious
acts. The respondent claimed and insurers refused. The
first court gave judgment in favour of respondent
hence the appeal. The insured stated that the theft i.e.
driver going to Morogoro other than Tanga where he
was authorized was malicious.
* Held: That the appeal be dismissed as negligence of
driver in getting intoxicated was the last cause of
accident but that is not material in law of insurance.
The negligence cannot be said to be a direct cause of
the loss.
* Negligence should be seen as part and parcel of the
malicious act of converting the use of the car from
Tanga to Morogoro. Malicious act was continuous and
included the act of driver’s negligence. In that sense
the malicious act was the dominant cause of the loss.
 8. Principle of Indemnity

❖ The Principle of Indemnity aims at putting the insured (in the

event of loss) in the exact position he has been immediately
before the occurrence of that event ( restitutio in integrum).
❖ The insured can recover the loss suffered by him/her up to the
limit of the amount covered by the insurance policy.
❖ All property and marine insurance contracts are contracts of
indemnity; however, a life insurance contract is not a contract of
indemnity because one cannot measure loss of life in terms of
money.
 Principle of Indemnity…

Purposes
❖ To avoid intentional loss.
❖ To reduce moral hazard.
❖ To prevent the insured from profiting from loss.
❖ To maintain the premium at low-level.
* The doctrine seeks to put the insured in the
position in which he was prior to the loss as
much as money can manage. Because the
insured should not make profit from his
misfortune, it is said that indemnity expects to
have a mere restitutio in integrum.
* As we all know indemnity does not occur in life
policies or other valued policies but for those policies
where indemnity applies insurer will be interested in
finding any circumstances that may reduce or negative
his liability. In awarding any claim in an indemnity
policy insurer will tend to take into account anything
that should have reduced the risk the insured may be
responsible for.
* It is argued that if the insurer does not take such
circumstances into account it will enable the insured to
get double indemnity.
* The doctrine is tied up with the doctrine of subrogation
and if the insured has to be indemnified by insurer
anything the insured receives in respect to the loss will
in effect reduce that loss to him.
* Because the insurer has to return him to the position
before the loss he must take into account anything the
insured received that reduces the loss. He does this in
two ways:-
* i). Pay the indemnity sum in full and the insured will
account to him on any other money he receives in
respect to the loss that reduces the loss.
* ii). Agree to pay indemnity sum and then claim for
accounting from insured person. Which monies should
the insured account to the insurer? It arises in three
situations:
* 1. If payment to the insured by a 3rd party is a gift that
diminishes the loss.
* 2. If payment arises under a contract of insurance
where indemnity money is more than the money
contracted.
* 3. Where payment is by a tortfeasor responsible for the
loss to insured person.
* i) Payment as gifts:
* Gifts to insured persons by 3rd parties may be claimed
by insurer if given with intention that they benefit both
insurer and insured. But if the gift was merely given to
benefit of the insured, no claim for reimbursement by
insurer will succeed.
* In Castellain –v- Preston (1983) 11 QBD – the
plaintiff’s house was insured against fire loss. The
plaintiff had agreed to sell the house to a 3rd party but
the house was then destroyed before sale transaction
was completed. He then lodged a claim with insurance
who indemnified him to the extent of the loss which
was £330. In the meantime he completed sale and was
paid full purchase price.
* The purchaser lodged a claim for indemnity price. The
claim was dismissed due to privity of contract.
* Insurer also claimed. The argument was that they
subrogated.
* Held: Insurer’s claim succeeds because to allow
insured person to keep both indemnity and purchase
money was double indemnity and was inequitable.
* If a gift is given to insured person for the benefit of
insured as well as of insurer the insurer are entitled to
the benefit. But if the gift is given for the benefit of
insured then it is not given to reduce the loss and
cannot be claimed by insurer.
* In Sterns –v- Village Main Reef Gold mining Co.
[1905] S.A.R – defendant gold was detained by
government of S.A in order to punish the defendant for
not supporting apartheid system of government.
* Defendant had insured against the loss of that gold by
any means. They were indemnified. Later on
government returned the gold in full on condition that
defendants support its policies. The plainfiff insurer
claimed either a refund of indemnity money or the gold
itself.
* Held: Plaintiff’s claim succeeds because to allow the
defendant to keep both gold and indemnity would
amount to double indemnity.
* They were entitled to gold or indemnity whatever was
less.
* ii) Payment by 3rd party tortfeasors:
* In Yorkshire Insurance Company –vs- Nisbet Shipping
Company Limited [1961] 2 All ER - a shipping
company insured their vessel for £72,000. The vessel
was destroyed by collision with another vessel at sea
owned by Canadian government.
* They claimed for indemnity from insurers who paid the
full amount. They then successfully claimed
compensation from Canadian government tortfeasors
for loss of the vessel and were awarded £127,000/=.
The insurers claimed the full £127,000/= because they
had already indemnified the full amount. Were they
entitled to this amount?
* Held: The Court stated that the insurer was entitled to
their indemnity money because their interest to subject
matter of insurance was limited by indemnity paid by
them.
* iii) Payment under contracts:
* In Darrel –vs- Tibbits [1980] 5 QBD - a landlord
insured property against loss from fire. The house was
destroyed by fire through negligence of a tenant.
* The landlord claimed and was indemnified. He sued
tenant who caused the fire under lease agreement and
the tenant paid damages and insurer claimed payment
from tenant.
* Held: claim succeeds as insured would be paid twice
over which would be against enrichment which would
be inequitable.
* In Scottish Union Insurance Company –vs- Davis
(1934) All ER - Davis took his car for repairs in a
garage after being smashed by a stone. His insurers
paid garage charges for car repair. Davis sued the
owner of building for damages and got £350.
* The car was poorly repaired and Davis took it from
garage after signing a satisfaction note. The insurers
laid claim on the $350 claiming they were entitled to
subrogate this amount as they had indemnified the
amount.
* Held: Claim fails because Davis had not been fully
indemnified because the car had not been returned to
the prior condition due to poor repairs.
* The requirements, for the doctrine of indemnity to
apply are as follows:
* 1. Actual indemnity money must be paid before the
insurer seeks to subrogate rights of the insured.
* 2. Indemnity must have been to full extent of loss so
that insured should have been fully restored to the
original position.
* 3. For insurer to claim reimbursement, payment must
have been intended for his benefit and that of insured
or payment made towards risk insured against and over
same subject matter.
* The justification is that to allow the insured to keep
both sums would be inequitable.
9). DOCTRINE OF RE-INSTATEMENT
* This is the repair or replacement of the subject matter
in circumstances in which it may be re-instated. Most
indemnity policies confer upon the insurer an option to
pay full indemnity or re-instate the subject matter.
* The insurer must exercise this option within a
reasonable time of notification of loss and is bound by
his option.
* If the insurer opts to re-instate, the subject matter must
be re-instated to the satisfaction of the insured.
* Any loss or liability arising in the course of
re-instatement is borne by the insurer.
* The economic effect of re-instatement is to benefit the
insurer by ensuring that he only pays full indemnity
where the re-instatement is not possible.
 10. Principle of Subrogation

❖ Subrogation is the substitution of the insurer in place of the

insured for the purpose of claiming indemnity from a third person
for a loss covered by insurance .
❖ According to the Principle of Subrogation, after providing the
compensation to the insured for the subject-matter, the insurer
gets every right against the third party.
❖ This is applied to all ‘Contracts of Indemnity’.
 Principle of Subrogation…

Purposes
❖ It enforces the rule of law and holds the guilty person to pay for
the loss.
❖ It helps the insurer to partially or fully recover the amount paid
for the loss.
❖ It prevents the insured from profiting from the damages, i.e.
obtaining compensation twice for the same loss.
❖ It helps to hold down the insurance rates. With reimbursement
from the concerned third party, the insurance company's losses
are substantially scaled down, the benefit of which, in turn, is
passed on to the final policyholders by way of a reduction in
premium .
 Principle of Subrogation…

NB/
❖ The insurer is entitled only to the amount it has paid under the
policy.
❖ The insured cannot impair the insurer’s subrogation rights.
❖ Subrogation does not apply to life insurance and to most
individual health insurance contracts.
❖ The insurer cannot subrogate against its own insureds .
* Subrogation is the placement of insurer into ownership
of the goods of the insured. This means that after the
insurer has indemnified the insured, he steps into the
shoes of the insured in relation to the subject matter. It
means that after indemnity the insurer becomes entitled
to all the legal and equitable rights in respect to the
subject matter previously exercisable by the insured.
* Subrogation facilitates indemnity by ensuring that the
insured does not benefit over and above restitution as
provided in the contract. It is an inherent and latent
characteristic of the contract of indemnity that becomes
operative after full indemnity. The insurer cannot
under subrogation rights recover more than the amount
payable as indemnity as was the case in Yorkshire
Insurance company Ltd –vs- Nisbeth Shipping Co.
* It is aligned to the doctrine of indemnity and
rationalized on the grounds of equity so that once
insured has been paid indemnity any payment that limit
his loss should be accounted to the insurer to avoid
double benefit to insured. It is justified so as to favour
underwriter to enable them not to pay more than full
indemnity and reduce losses by amount of subject
matter remains.
* In the Castellain case, subrogation was defined to mean
placing the insurer in the position of insured.
* Insurer is thus entitled to all rights whether legal or
equitable that accrues to the insured.
* In Rahim Tullan and Premji –vs- Bisham Singh [1970]
KLR – the plaintiff had insured goods on transit
against loss. The goods were destroyed at Nakuru
through defendant’s negligence.
* He claimed and was indemnified to the extent of
£2,400. He sued the defendant who raised a
preliminary objection and argued that the plaintiff had
no loss that would entitle him to sue for.
* Held: The objection fails as the insured had a duty
under the insurance contract to pursue any 3rd party
claim on behalf of insurer and not to prejudice interests
of insurer in any such 3rd party claims.
* In Groom –vs- Crocker and Others [1938] All ER – it
was observed that if insurer’s Advocates were to
pursue such claim against 3rd parties they should not
prejudice interests of insured.
* In Commercial Union Assurance Company –vs- Lister
(1874) AC 483 - Lister had underinsured his will. The
will was destroyed by a local authority council.
* Because he knew he would not get indemnity he
abandoned any claim under insurance. He sued local
council and insurer applied to be joined as parties
because they knew damages would be higher. They
said they were entitled to subrogate the rights of
insured.
* Held: application fails because their right to subrogate
was subject to full indemnity and since they had not
indemnified the defendant they would not be entitled to
subrogate.
* Accordingly an insurer’s claim in an under-insured
subject matter will always be less than the value of
subject matter hence subrogation may not be allowed.
 11. Principle of Contribution and
apportionment

Conditions for contribution principle to operate

❖ The risk insured against must be common to all the policies.
❖ All the policies must be in force during the occurrence of a loss.
❖ All the policies must cover the same subject matter of insurance
(exposure unit). If all the policies cover the same insured but
different subject matter altogether, then the question of
contribution would not arise.
❖ All the policies must cover the same insurable interest of the same
insured.
* They arise where an insured person takes out more
than one insurance policy in a bid to have more
indemnity than the value of subject matter. The
insurers argue that because of doctrine of insurable
interest the excess insurance will not be backed by any
insurable pecuniary interest in the property.
* If an insured has taken out more than one policy on the
same subject matter and risk with different insurers and
loss occurs, the twin principles of contribution and
appointment apply:-
* a. If the insured claims from all the companies at the
same time, they apportion the loss between themselves
on the basis of the sums insured. Each insurer bears
part of the loss. This is the “Principle of
Apportionment”
* b. If one of the insurers makes good the total liability
to the insured, such insurer is entitled to recover the
excess payment from the other insurer. This is the
“Principle of Contribution”. This principle is to the
effect that an insurer who has paid more that his lawful
share of the loss is entitled to receive the excess from
the other insurer.
* The principle of contribution is equitable. An insurer is
only entitled to contribution if the following conditions
exist:
* 1. There must have been more than one policy on the
same subject matter and risk.
* 2. The policies must have been taken out by or on
behalf of the same person.
* 3. The policies must have been issued by different
insurers.
* 4. The policies must have all been in force when loss
occurs .
* 5. All the policies must have been legally binding
agreements.
* 6. None of the policies must have exempted itself from
contribution.
* The twin principles of contribution and apportionment
facilitate indemnity.
* In Scottish Amicable Heritage Securities –vs- North
Assurance – the court observed as follows:
* “The principle of contribution depends on doctrine not
of law only but of common sense also. That a man who
insures his interest in property against a loss on
contract of indemnity whether that interest is of a
proprietor or creditor he cannot recover
* from the insurer a bigger sum than he has lost in the
contingency.
* So in case of double insurance with double interest
with different insurance companies the insurer cannot
receive more than the amount he has actually suffered.
To allow him to do so would be tantamount to
allowing him to recover from an interest not backed up
by an insurable interest.”
* Where an insured has taken up more than one
insurance policy, it is said he has over insured and
when loss occurs the insurance company will apportion
liability of subject matter against themselves to the
value of 100% and then divide among themselves and
then prorate it to the value. Apportionment with regard
to value, they will contribute the insured sum on an
equal basis in terms of that apportionment.
* The Marine Insurance Act S.321 makes relevant
provision (ref). The doctrine is justified on the doctrine
of equity among others. Lord Manfield emphatically
stated that for it to be successfully pleaded:
* 1. Subject matter of insurance must be the same. Under
S.181 of the Marine Insurance Act, the insured person
will be responsible for any loss above the under
insured value.
* 2. The risk insured against must be the same and
insured must be the same person having the same
interest.
* 3. Both policies must be in force at same time and both
must be legally enforceable.
* Contribution must not be excluded by the terms of any
policy.
* DOCTRINE OF SALVAGE
* This is the recovery by the insurer of the remains of the
subject matter after indemnity. It is part of subrogation
and facilities indemnity. It is justified on the premise
that the amount paid by the insurer as indemnity
includes the value of the remains.
* The law recognizes that in the event of loss, the subject
is not so destroyed as to have no value.
* Situation of total loss: where subject matter is
destroyed as to make reinstatement of subject matter
impossible and valuation of the salvage would give
distorted value of the loss then we say there is total
loss and expect full indemnity. In that case, salvage
would be whatever remains the insurer wants to lay
claim to. Justification is same as that of indemnity.
* From insurance practice, where loss of subject matter
is more than 50% and cost of reinstatement exceeds
the value of the subject matter, they would declare the
subject matter totally destroyed. They would require
the insured to abandon reinstatement. Look at S.61 and
62 Marine Insurance Act.
* In Sutherland –vs- Sum Fire Office Insurance
Company [1852] LR - it was
* observed that the option to reinstate should not be
exercised immediately after
* loss, it should wait until a claim is made by insured
* In Sutherland –vs- Sum Fire Office Insurance
Company [1852] LR - it was observed that the option
to reinstate should not be exercised immediately after
loss, it should wait until a claim is made by insured
because it’s reasonable to expect him to furnish expert
knowledge on that loss.
* In John Kakonge –vs- Oriental Fire Insurance
Company [1985] EA – the plaintiff’s car was damaged
and sent to the garage on advice of insurer. Repairs
were shoddy.
* The plaintiff sought more money to get better repairs
done but the insurer disclaimed liability saying the
plaintiff had certified that repairs were good thus not
entitled to any money…
… and that paying more money would make
reinstatement more costly than indemnity.
* Held: once reinstatement was accepted it was
immaterial that it is more costly than full indemnity as
the subject matter had to be reinstated to its initial
position whatever the cost.
* 13. ABANDONMENT
* This is the surrender by the insured of the remains of
the subject matter for full indemnity. It entails the
giving up the residue to the insurer for indemnity. This
principle has its widest application in Marine Insurance
but generally applies in case of:-
* a. Partial Loss
* b. Constructive total loss.
* The insured must notify the insurer of his intention to
abandon the subject matter.
* However, it is for the insurer to determine whether or
not abandonment is applicable. If the insurer opts to
pay full indemnity, it signifies the sufficiency of the
insured’s notice and it is an admission of liability. The
insurer becomes entitled to the remains of the subject
matter.
* . AVERAGE CLAUSE
* This is a clause in an insurance policy to the effect that
if the subject matter is under insured and partial loss
occurs, the insurer is only liable for a proportion of the
loss and where loss is minimal the insurer liability is
extinguished. This clause ensures that subject matter is
insured at its correct value.
 15. Principle of Mitigation

❖ This principle places a duty on the part of the insured to make

every effort and to take all such steps as a person of ordinary
prudence to mitigate or minimize the loss in the event of some
mishap to the insured property.
❖ This makes the insured to be more careful or active in protecting
the subject matter from any possible loss.
❖ If he/she fails to act in such a manner, the insurer can avoid the
claim of the insured, on the ground of negligence on the part of
the insured.
* INSURANCE CLAIMS
* PROCEDURAL DUTIES OF CLAIMANT:
* Contracts of insurance will always have;
1. Procedural terms – Terms of procedure to be followed
when claims are made.
2. Substantive terms – cover the concepts of claim or
principles of law of insurance.
* With regard to procedural terms, the Kenyan system is
a fault based system where somebody must be at fault.
Notice of not only the occurrence of loss but also of
circumstances under which it occurred must be given.
Whoever was at fault must not be the claimant. A loss
should not be wilful.
* This leaves a lot of room for disputes i.e. failure to
raise claim at specified time and of who was at fault.
* Because of uncertainty, the cost of insurance is a little
higher.
* Some people argue we should change to a no-fault
system where if insurance risk occurs we don’t ask for
circumstances but only expect claims. That shifts the
whole projection of law of tort because we would not
be looking for proof of liability but leave companies to
pay on proof of loss.
* It is argued, this system, which operates in parts of
America, Canada and Scandinavia, premiums would be
less. It would be so because there would be so many
companies of insurance. It would reduce litigation. It
would save time.
* Until that happens we have to deal with procedural
terms where notice has to be given together with
disclosure of who is responsible to whoever is
responsible for the loss.
* The insurer should however be reasonable not to
repudiate liability if circumstances of loss do not allow
giving of notice within the time stipulated in the
policy.
* In Gamble –vs- Accident Insurance Company- Notice
was to be given within 3 days after occurrence of loss.
Gamble who had an accident and in which all
passengers had perished and neither the parents nor
next of kin had known of it until 1 month …
* …later they gave notice but insurer argued period of
notice had lapsed.
* Held: Notice was valid as circumstances were not
amenable to giving notice earlier than that. Usually the
form will be standard.
* With regard to particulars of loss insurers insist that the
loss has to have been resulting from the peril insured
against. The particulars of loss must either be in line or
in proof of loss insured against.
* In N.P. Shah & Another –v- South British Insurance
Company [1965] EA -appellants claimed under
burglary policy with particulars that their watches and
other jewellery had been burgled from their shop after
a break-in. All evidence showed that there was only a
break-out.
* Held: The particulars provided were not supporting a
claim under policy of burglary.
* They supported a claim under infidelity which was not
in the policy.
* In Kanti & Co. –vs- British Traders Company Limited
[1965] EA – the plaintiff had taken all risk policy
covering goods in transit. They transported goods from
Mombasa to Nairobi. On arrival in Nairobi goods were
found to have been destroyed
* due to rubbing. They were enamel goods.
* The assessor said the loss was due to rough handling or
poor packaging but no particular cause could be
unequivocally found.
* Held: the plaintiff had failed to prove the particulars of
cause of that loss, accordingly he had failed to bring
that loss within the range of the insurance.
* The proof of loss would be on a balance of
probabilities that must be reasonably discharged.
* In A B –vs- Northern Accidental Insurance Company
Limited 91886) 24 ER – the plaintiff was a doctor
covered under insurance policy against accidental
contraction of diseases through operation. He alleged
he had contracted syphilis through an alleged
accidental cutting of his finger while operating a
patient when he did not suspect of the patient having
the disease.
* Neither the patient nor any other doctor or other
evidence was called to proof the same.
* Held: The particulars of loss were not in proof of any
injury under the policy.
* Standard of proof was not met.
* INSURANCE DISPUTES:
* More often than not insurance disputes find their way
to the courts.
* One would however wonder whether arbitration would
not be a better option in settling disputes given the
usual advantages that are normally associated with
arbitration as opposed
* to litigation, namely:
* (i) Expediency
* (ii) Promotes secrecy
* (iii) Cheaper/costs
* (iv) Procedural technicalities [simpler]
* (v) Personnel required are easy to secure
* (vi) One can choose his own judge [Institutional –v-
Ad hoc]
* (vii) Arbitrators will always split the difference so that,
the winner takes all notion of litigation, is dispensed.
* See s. 169 and 170 on establishment and powers of
Insurance Tribunal. The Act gives the tribunal the
power to hear appeals arising from the Insurance Act.