Detailed Notes on Insurance Law (GLUE 3013)

Introduction to Insurance

Definition of Insurance

Insurance is defined as an agreement where the insurer promises to indemnify the insured for
specific losses upon their occurrence, provided the insured pays a premium. It is a form of
risk management designed to protect against the risk of contingent, uncertain losses.

Purpose of Insurance

The primary purpose of insurance is to provide financial security to the insured in the event
of unforeseen incidents. Insurance transfers the risk of loss from the insured to the insurer in
exchange for a premium. This transfer helps individuals and businesses manage potential
losses without bearing the full brunt of their financial impact.

Key Case:

• Prudential Insurance v IRC (1904) 2 KB 658: This case defines an insurance

contract as one where the insured secures a benefit, usually monetary, upon the
occurrence of an event, in exchange for periodic payments called premiums.

Basic Terminologies in Insurance

• Insurer: The company that sells the insurance policy and assumes the risk.
• Insured: The individual or entity that is protected by the insurance.
• Policyholder: The owner of the insurance policy; the entity that buys the policy.
• Policy: The actual insurance contract that outlines the terms and coverage.
• Premium: The amount of money charged for the insurance coverage.
• Insured Risk: The specific event or peril against which the insurance is obtained.

Illustration of Basic Terminologies

An insurance policy involves the insurer providing protection against specified risks in
exchange for premiums paid by the policyholder. If the insured event occurs, the insurer
compensates the insured according to the policy terms.

Principle of Pooling of Losses

• Concept: Insurance operates on the principle of pooling losses, where the losses of a
few are spread across many policyholders. This mechanism ensures that no single
policyholder bears the full financial impact of a loss.
 • Mechanism: By charging premiums to a large number of policyholders, insurers
collect a pool of funds. When a loss occurs, the insurer uses these funds to
compensate the affected policyholders, thus distributing the risk among all insured
parties.

Example:

If 1,000 house owners each pay RM 200 in premiums, the total pool is RM 200,000. This
fund is used to cover claims, expenses, and profit for the insurer.

History of Insurance

• Origins: Insurance began with Italian merchants who were concerned about losing
their goods during sea voyages. They agreed to share the losses among themselves if
any merchant's goods were lost or damaged.
• Development: The concept of underwriting developed in England, particularly at
Lloyd's of London, where merchants and insurers gathered to sign papers agreeing to
cover specific risks.

Classification of Insurance

Marine vs. Non-Marine Insurance

• Marine Insurance: Covers risks associated with maritime activities, such as the loss
or damage of ships, cargo, and terminals during transport.
• Non-Marine Insurance: Covers all other types of risks, including life and general
insurance policies.

Life vs. Non-Life (General) Insurance

• Life Insurance: Policies that cover events related to human life, such as death or
survival beyond a certain period.
o Examples: Life policies, endowment policies.
• Non-Life Insurance: Policies that cover risks not related to human life.
o Examples: Motor insurance, property insurance, liability insurance.

First Party vs. Third Party Insurance

• First Party Insurance: Provides coverage for the insured's own property or life.
• Third Party Insurance: Provides coverage for the insured's liability towards another
party.

Understanding Risk in Insurance

 • Definition: Risk refers to the exposure to potential loss or an unpleasant outcome. It
is the underlying reason for the existence of insurance.
• Associated Terminologies:
o Peril: The cause of a loss (e.g., fire, theft).
o Hazard: A condition that increases the likelihood of a loss occurring. Hazards
can be physical (e.g., faulty wiring) or moral (e.g., fraudulent claims).
o Loss: The reduction in value or damage resulting from a peril.

Types of Risks

1. Fundamental vs. Particular Risks:

o Fundamental Risk: Affects a large number of people (e.g., natural disasters).
o Particular Risk: Affects specific individuals or entities (e.g., theft).
2. Dynamic vs. Static Risks:
o Dynamic Risk: Changes with economic conditions (e.g., inflation).
o Static Risk: Remains constant regardless of economic conditions (e.g., natural
disasters).
3. Pure vs. Speculative Risks:
o Pure Risk: Only involves the possibility of loss or no loss (e.g., fire).
o Speculative Risk: Involves the possibility of loss, no loss, or gain (e.g., stock
market investment).

Insurable Risk

• Definition: An insurable risk is one that meets certain criteria making it suitable for
insurance coverage.
• Characteristics:
o Must be a pure risk.
o Must have financial value and be measurable in monetary terms.
o Must affect a large number of similar risks.
o Must not involve catastrophic losses.
o Must be accidental or fortuitous.
o Must be homogeneous in nature.
o Must be legal and not against public policy.

Insurance Contract Principles

Formation of Insurance Contract

1. Offer and Acceptance:

o The insured makes an offer by submitting a proposal form.
o The insurer accepts the offer, rejects it, or makes a counteroffer.
o Case: Canning v Farquhar (1886) 16 QBD 727 - Acceptance is upon payment
of the premium; a change in the risk before payment allows the insurer to
reject the offer.
 oCase: Adie & Sons v Insurance Corp Ltd (1898) 14 TLR 544 - Acceptance can
be established through formal acceptance, issuing the policy, or accepting the
premium, even if the policy is not yet issued.
2. Parties to Contract:
o Insurer: Must be a licensed entity under the Financial Services Act.
o Insured: Must have legal capacity, including being of sound mind, of majority
age, and not disqualified from contracting (e.g., not bankrupt).
3. Intention to Enter Contract:
o Both parties must intend to create a legally binding agreement.
o Must be free from coercion, mistake, or misrepresentation.
o Case: Tay Hean Seng v China Insurance Co (1953) MLJ 38 - Policies can be
rectified to reflect the common intention of the parties if not correctly
documented.
4. Consideration:
o Insured: Payment of the premium.
o Insurer: Assurance of compensation for covered losses.

Proposal Form

• The proposal form provides the insurer with detailed information about the risk.
• Misrepresentation or non-disclosure in the proposal form can render the insurance
policy void.
• Case: Pang Lim v China Insurance Corp Ltd (1975) 2 MLJ 239 - Deletion of extra
coverage was upheld because the insured asked for the insurer's usual policy terms.

Cover Notes

• Temporary documents indicating the insurer's preliminary agreement to provide

coverage pending the formal issuance of the policy.
• Case: Makie v European Assurance Society (1869) 21 LT 102 - Cover notes are valid
contracts providing temporary coverage.

Policy

• The policy document contains detailed information about the insurance contract,
including the insured party, the period of coverage, the premium, covered risks,
exclusions, and terms and conditions.
• The policy serves as the definitive agreement between the insured and the insurer.

Commencement of Coverage

• Coverage typically begins with the acceptance of the policy.

• Special conditions may apply, such as premium payment requirements in life
insurance policies.
• Case: Borhanuddin Hj Jantara v American International Assurance (1987) 1 MLJ 22
- Payment of the premium is required for the commencement of the policy; failure to
issue the policy does not negate the agreement.

Cooling-Off Period
 • Applicable to long-term policies like life insurance.
• Allows the insured to cancel the policy within 15 days (or longer if specified) and
receive a full refund of the premium.

Condition & Warranty

Definitions

• Condition: A critical term in a contract that goes to the root of the agreement. Breach
of a condition allows the aggrieved party to terminate the contract and claim damages.
• Warranty: In insurance law, a major term that must be strictly complied with. Breach
of a warranty allows the insurer to repudiate the contract from the date of breach.
• Case: Hussain v Brown (1996) - Differentiates between conditions and warranties in
insurance contracts.

Types of Warranties

1. Affirmative Warranties: Statements about past or present facts that must be true at
the time they are made.
2. Promissory Warranties: Ongoing promises that certain conditions will be met
throughout the policy term.
3. Warranties of Opinion or Belief: Statements based on the insured’s belief or
opinion, not necessarily facts.

How Warranties are Made

1. Express Warranties: Explicitly stated in the policy or related documents.

o Case: De Maurier (Jewellers) v Bastion Insurance & Caronet Insurance Co -
Use of "warranty" indicates an intent to create a warranty.
2. Implied Warranties: Inferred from the nature of the agreement or the circumstances.
3. Basis of Contract Clause: A declaration in the proposal form that the information
provided is true and forms the basis of the contract.
o Case: Thomson v Weems
o Case: Dawsons Ltd v Bonnin
o Case: Suhaimi b Ibrahim v United Malaya Insurance Co Ltd
o Case: China Ins Co v Ngau Ah Kau

Construction of Policies

General Principles of Construction

• Intention of the Parties: The court seeks to ascertain the intention behind the
contract terms.
• Plain Ordinary Meaning: Words in the policy are given their ordinary meaning
unless defined otherwise.
 • Fair and Reasonable Construction: Avoids interpretations that lead to absurd or
unreasonable outcomes.
• Case: Malaysian National Insurance v Mohd Daud (1926) - Insurance policies, being
commercial contracts, should be construed with general principles of commercial
contracts in mind.

Special Cases

• Ambiguities: Interpreted in favor of the insured.

• Contra Proferentem Rule: Ambiguous terms are construed against the drafter
(usually the insurer).
o Case: Central Lorry Services Co Sdn Bhd v The American Insurance (1981) 1
MLJ - Ambiguities in policy terms should be construed in favor of the insured.
• Handwritten vs. Printed Words: Handwritten terms take precedence over printed
ones if there is a conflict.
o Case: Tay Hean Seng v China Insurance Co Ltd (1953) MLJ 38 - Handwritten
terms indicating additional premium for pillion riding took precedence over
printed exclusion clauses.
• Policy vs. Other Documents: The policy takes precedence over other documents
incorporated into the contract.
o Case: Koh Kok Eng v Regina (1955) MLJ 17 - The policy document must be
given priority over other incorporated documents in case of conflict.