LAW OF INSURANCE THE CONTRACT OF INSURANCE According to Professor Ivamy, "a contract of insurance in the widest sense of the

term may be defined as a contract whereby one person, called the "Insurer," undertakes, in return for the agreed consideration, called the "Premium", to pay to another person, called the "Assured", a sum of money, or its equivalent, on the happening of a specified event". It was judicially defined by awrence, !. in LUCENA v CRAUFURD as "a contract by which the one party in consideration of a price paid to him adequate to the risk becomes security to the other that he shall not suffer loss, damage, or prejudice by the happening of the perils specified to certain things which may be e"posed to them". #o be an enforceable agreement, a contract of insurance must contain the following essential elements of a contract$ i ii iii iv v offer and acceptance% consideration% legal purpose% competent parties, and legal form.

The offer &ince the contract of insurance is constituted by the acceptance of an offer, it is necessary in the first instance to make certain that an offer has in fact been made which is capable of being accepted. #o constitute an offer capable of being accepted, the following conditions must be fulfilled$ 'a( #he alleged offer must be intended by the party making it to be an offer. #he party who begins the negotiations does not necessarily make an offer thereby% he may merely indicate his readiness to consider an offer. #he alleged offer must be complete. It must show with precision the contract into which the party making it is prepared to enter. #he alleged offer must be communicated to the other party. In Rose v Medical Invalid Life Assurance Socie ! ')*+*( the insurers stated in a letter handed to their own agent the premium at which they were willing to accept the proposal. #he agent did not hand over the letter to the proposed assured. It was held that there was no contract of assurance. 'd( #he alleged offer must be in force at the time when the other party purports to accept it. An offer may be revoked before acceptance% and an offer once refused ceases to be in force and cannot afterwards be accepted unless it is repeated ' see H!de v Wrench(.

'b( 'c(

Who "a#es he insurance offer, #he offer to enter into a contract of insurance may, as a general rule, be considered as addressed to the insurers by the person who is seeking to protect himself by insurance against loss. -e may have been invited by the insurers to put himself into communication with them% but, whether the invitation comes to him from the insurers direct, or through

the medium of an agent, or whether it is given to him personally, or only as a member of the public through an advertisement, the position remains unchanged, and he "us su$"i his %ro%osal, which they may accept or decline at their pleasure. #he offer therefore proceeds from the proposed assured when he has filled up he %ro%osal for" and forwarded it to the insurers. #he terms of an ordinary contract of insurance are not specially arranged between the parties% the insurers have their own terms upon which they are prepared to contract and from which, as a rule, they are not willing to depart. #here is no real negotiation between the parties, the assured being compelled to contract with the insurers upon their own terms. #here is, therefore, no difficulty, in an ordinary case, in ascertaining fro" &ho" he offer %roceeds. The %ro%osal for" Proposal forms vary in their content according to the nature of the proposed insurance and also according to the practice of different insurers. All proposal forms, however, contain questions which the proposed assured is required to answer, and these questions, whatever the nature of the insurance, are framed on the same general lines. #he matters to which the questions relate may be classified as follows$ i. #he description of the proposed assured. ii. #he description of the risk proposed to be insured. iii. #he description of circumstances affecting the risk. iv. #he previous history of the proposed assured. Acce% ance A proposal is not necessarily accepted at once, since the insurance company may take time to consider it. If the proposal is submitted through an agent, the agent usually has no authority to accept it himself, but must forward it to the insurers in order that they may decide whether to accept it or not. #here is therefore as a rule an interval of time between the making of the proposal and the final decision. 'Cover no es( In the case of some types of insurance, especially motor, burglary and fire insurance, it is the practice of insurance companies to issue a "cover note" to the proposer pending the issue of the policy. #he cover note "is issued at once on receipt of a proposal and covers the assured
and puts the underwriters on risk for the period while the proposal is being considered and until a policy is either granted or refused" 'per Pearson, !($ )ulien *rae v H+,+ *oland L d ')./0(. 1over notes are not issued in cases of life assurance.

For" of he cover no e #he cover note is, in practice, printed in common form% it is usually signed on behalf of the insurance company by the agent through whom the proposal was submitted, and issued by him to the proposer. The effec of he cover no e In Mac#ie v Euro%ean Assurance Co. 2alins, 3.1, stated that the cover note is in itself a contract of insurance, governing the rights and liabilities of the parties in the event of a loss taking place during its currency. #he assured is, therefore, entitled to enforce the contract contained in the cover note, provided that he has complied with its conditions, e.g. as to payment of the premium. -owever, if a policy is issued before the payment of the premium, the issue may amount to a &aiver of the condition$ Ro$er s v Securi ! Co+ Ld The incor%ora ion of he er"s of he %olic!

#he cover note itself may contain no terms at all, but usually it incorporates the conditions of the company4s policy, e.g. as in -ueen Insurance Co v *ARSONS ')**)( where the cover note stated that the proposer "has proposed to effect an insurance against fire, subject to all the usual terms and conditions of this company". &ometimes the cover note incorporates the terms of the policy not by referring to them directly but by referring to the P56P6&A 7652 which itself alludes to them. #he insurance company may also rely on the terms and conditions of the policy if it can be shown that the assured 89:; 67 #-:2, or to have had the opportunity of knowing them, and to have agreed to be bound by them. 7or e"ample in ,OLDIN, v RO.AL LONDON AU/ILIAR. INSURANCE CO ').)+( a fire took place during the currency of the cover note. #he claim was referred under the arbitration clause in the company4s 65<I9A5= 7652 67 P6 I1= and no question was raised as to whether it applied or not. 6n the other hand, as against the insurers, the cover note is to be construed with reference to the common form of policy issued by them, and they cannot rely upon a construction of the cover note inconsistent therewith$ 0ROWNIN, v *RO1INCIAL INSURANCE CO OF CANADA ')*>?( Re%lace"en of he cover no e $! a %olic! #he cover note is normally replaced in due course by A P6 I1=, but the insurance company is 96# @6A9< to issue one, unless there is an agreement to that effect. #he assured, too, is not bound to accept the policy. In Mac#ie v Euro%ean Assurance Socie ! 2alins, 3B1 stated$ "<uring that month 'i.e. when the cover note was in force( it was open to the CcompanyD on further inquiry to 5:7A&: to grant the policy and to terminate the contract at the end of the month. It was equally open to the assured to say that he did not like the 'company(, not thinking the capital sufficient, or for other reasons." 0ro#er2s cover no e ;here the insurance is effected through a broker, the broker, pending the preparation of the policy, issues a "$ro#er3s CO1ER NOTE", certifying that the insurance has been effected and setting out its terms. @y issuing the cover note, the broker does not incur liability upon the insurance, since he does not purport to be an insurer. @ut he is presumed to warrant to the proposer that his instructions have been properly carried out, and that the insurance has been effected. If, therefore, there is no insurance in fact, he will be liable for breach of the warranty. &uch a cover note is not binding on the insurers. The acce% ance 'i( What constitutes acceptance #here cannot be an acceptance so long as the terms of the contract of insurance are still under discussion and the premium remains to be fi"ed, since there is 96 169#5A1# until complete agreement has been reached, and nothing remains to be done by either party e"cept to perform what has been agreed. #he offer, therefore, must be co"%le e on the face of it, and the acceptance must be in the 3:5= #:52& of the offer B in accordance with the rules of the common law relating to offer and acceptance. 'ii( The methods of acceptance #he methods of accepting the 677:5 will depend on whether the offer is made by the proposer as it normally will be, or whether it is made by the insurer. ;here the offer is made by the proposer, the final acceptance of a proposal may be signified by the insurers in one or other of the following ways$

'a( 'b( 'c( 'd( 'a(

@y a formal acceptance which is A9169<I#I69A . @y the issue of a policy. @y acceptance of the premium. @y the conduct of the insurers.

Issue of %olic! #he issue of the policy is a conclusive intimation that the insurers have accepted the proposal. In WRI,HT v SUN MUTUAL LIFE INSURANCE CO. it was e"plained that, if an insurance company is $! i s cons i u ion bound to issue its policies under seal, a policy issued ;I#-6A# A &:A may be effective as a valid con rac to issue a policy under seal. 6nce the policy is issued, the insurers are bound by their acceptance and will be estopped by the issue of the policy and the receipt of the premiums from alleging that there was no contract on the ground that 96 P56P6&A had ever been signed$ *earl Life Assurance Co+ v )ohnson ').0.(. In the case of a policy under seal, the acceptance is completed by the e"ecution of the policy. In Ro$er s v Securi ! Co. ')*.>( opes, .! stated$ "#he question we have to consider is whether there was a concluded agreement for insurance, or the matter had not gone beyond the stage of negotiation. In my opinion the policy, being duly e"ecuted as it was by the &:A I9E A9< &IE9A#A5: by the directors and secretary of the company, constituted a concluded agreement..... in my opinion if the day after its being so e"ecuted, the plaintiff had tendered the premium and demanded the policy, there would have been no answer to the demand". It is therefore immaterial that the policy is retained by the insurers in their possession, and never handed over to the proposer, in as much as no for"al acce% ance is re4uired fro" hi", nor need he take away the policy in order to complete the delivery. #he policy, as an enforceable contract of insurance, is complete as from the date of its issue, even though 96 P5:2IA2 -A& @::9 PAI< at the time of the losses in respect of which the proposer seeks to enforce it. @y the terms of the policy, however, he may be, in some cases, precluded from enforcing it in respect of any loss happening before he has complied with its conditions, e.g. by paying the premium. #he issue of a policy is not, however an acceptance in the following cases% 'i( ;here the assured does not treat the policy as an acceptance, but continues the negotiations for the purpose of obtaining an alteration in its terms, as occurred in &ickness and Accident Assurance Association v Eeneral Accident Assurance 1orporation. ;here the policy, as issued, departs from the proposal by introducing a fresh term, and thus constitutes not an acceptance but a counterBoffer. #his was stated by ord oreburn .1 in Allis5Chal"ers Co v Mar!land Fideli ! and De%osi Co+ #he introduction of the fresh term shows that the agreement is not yet complete, since something remains to be done by the proposer to declare his

'ii(

adoption of it. 'b( Conduc of he insurer :ven where the premium has not been paid, nor the policy issued, the facts may clearly show that the insurers have accepted the proposal, and that there is a binding contract between the parties, on the part of the proposer to pay the premium, and on the part of the insurers to issue a policy. ;here this is the case, the insurers cannot refuse to accept the premium when tendered, or otherwise repudiate their contract, and will be liable for a loss happening even before a policy is issued or the premium is paid. 'c( ;hat facts constitute an acceptance on the part of the insurers will depend upon the circumstances of the particular case. A mere demand for the premium is sufficient. @ut mere delay in dealing with an application for insurance does not constitute an acceptance, unless it is the duty of the insurers to intimate their rejection promptly. Acce% ance and re en ion of he %re"iu" ;here no policy has been issued to the proposer before the loss, the receipt of the premium and its retention by the insurers, though by no means conclusive, may raise the presumption, in the absence of any circumstances leading to a contrary conclusion, that the insurers have definitely accepted his proposal. In such a case they are not entitled to refuse to issue a policy to him, and they are, therefore, liable to him in the event of a loss. The effec of he acce% ance 6n the final acceptance of the proposal the negotiations come to an end and the duty of disclosure ceases. #he assured, therefore, is under no obligation either to disclose any material facts which only come to his knowledge or to correct any misrepresentation the inaccuracy in which is only discovered after acceptance. An acceptance once given binds the parties and cannot be withdrawn e"cept by mutual consent. It is immaterial that the parties have misapprehended their position and have cancelled the policy on the assumption that no contract e"ists between them. Non5disclosure 6U "os 7ood fai h8 Uberrimae Fidei It is a fundamental principle of insurance law that he u "os 7ood fai h must be observed by each party. #his rule was stated by ord 2ansfield in CARTER v 0OEHM ')>//( as follows$ "Insurance is a contract upon speculation. #he special facts, upon which the contingent chance is to be computed, lie more commonly in the knowledge of the insured only$ 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 e"ist, and to induce him to estimate the risk as if it did not e"ist. The #ee%in7 $ac# such circu"s ance is a fraud9 and herefore he %olic! is void. Although the suppression should happen through mistake without any fraudulent intent, yet still the under&ri er is deceived, and the policy is void% because he ris# run is reall! differen fro" he ris# unders ood and in ended o $e run a he i"e of he a7ree"en +++++ the governing principle is applicable to all contracts and dealings. Eood faith forbids either party by concealing what he privately knows, to draw the other into a bargain, from his ignorance of that fact, and his believing the contrary....."

'd(

#he case of CARTER v 0OEHM concerned a policy which had been taken out against the taking of a fort by a foreign enemy but the principle of law stated therein by ord 2ansfield was applied by !essel, 2.5 to LONDON ASSURANCE v MANSEL )*>., which was a case concerning life assurance in which he stated$ "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 and another. Whe her i is life9 or fire9 or "arine assurance9 I a#e i 7ood fai h is re4uired in all cases9 and though there may be certain circumstances from the peculiar nature of marine insurance which require to be disclosed, and which do not apply to other contracts of insurance, that is rather, in my opinion, an illustration of the application of the principle than a distinction in principle". In RO:ANES v 0OWEN ').F*( the court stated$ "It has been for centuries in :ngland the law in connection with insurance of all sorts, marine, fire, life, guarantee and every kind of policy, that, as he under&ri er #no&s no hin7 and he "an &ho co"es o hi" o as# hi" o insure #no&s ever! hin79 i is he du ! of he assured9 he "an &ho desires o have a %olic!9 o "a#e a full disclosure o he under&ri ers WITHOUT 0EIN, AS;ED OF ALL THE MATERIAL CIRCUMSTANCES9 because the underwriter knows nothing and the assured knows everything. Tha is e<%ressed $! sa!in7 ha i is a con rac of he u "os 7ood fai h 5 U0ERRIMA FIDES". In )OEL v LAW UNION AND CROWN INSURANCE CO+').0*( 7letcherB2oulton stated that he %ur%ose of he u$erri"a fides rule is o i"%ose on he %ar ies o an insurance con rac he du ! o hel% each o her o co"e o a ri7h conclusion+ #he parties are not allowed to hold each other at arm4s length in defence of what they might perceive to be their conflic in7 in eres s. 1onsequently, it is the duty of the assured not only to be honest and straightforward but also to make a 7A <I&1 6&A5: 67 A 2A#:5IA 7A1#&. All statements made by him during the negotiations must also be accurate. &imilarly, it is the duty of the insurers and their agents to disclose A 2A#:5IA 7A1#& ;I#-I9 #-:I5 896; :<E:. In particular, all representations made by them during the negotiations with a view of inducing the assured to accept a policy must be true. In CARTER v 0OEHM ')>//( ord 2ansfield stated 'obiter( that "the policy would be equally void, against the underwriter, if he concealed% as, if he insured a ship on her voyage which he %riva el! #ne& to be arrived% and an action would lie to recover the premium". In RE= 0RADLE. AND ESSE/ AND SUFFOL; ACCIDENT INDEMNIT. SOCIET. ').)F( 7arwell, .!. stated$ "1ontracts of insurance are contracts in which u$erri"a fides is required, not only from the assured, but also from the company assuring". Non5 disclosure #he assured is under a duty to disclose all "a erial fac s relating to the insurance which he proposes to effect. In addition he must make no "isre%resen a ion regarding such facts. ). The e< en of he assured2s du ! #he assured must disclose all material facts which are within his actual or presumed knowledge.

'a(

Actual Knowledge #he special facts distinguishing any proposed insurance are, as a general rule, unknown to the insurers who are not in a position to ascertain them. #hey lie, for the most part, solely within the knowledge of the proposed assured. Eood faith, therefore requires that he should not, by his &I :91:, mislead the insurers into believing that the risk, as proposed, differs, to their detriment, from he ris# &hich he! &ill ac uall! run. 6n the contrary, he should help them by every means in his power to estimate the risk at its proper value$ )OEL v LAW UNION AND CROWN INSURANCE CO. 'Per 7letcherB 2oulton .!( A failure on the part of the assured to disclose a material fact is sometimes called "concealment". &trictly speaking, however, the word implies the #ee%in7 $ac# or su%%ression of something which it is the duty of the assured to $rin7 s%ecificall! o he no ice of he insurers9 and not merely an inadver en o"ission to disclose it. -ence, where the failure to disclose is not due to <:&IE9 and the assured has no intention to deal otherwise than frankly and fairly with the insurers, the term 4969B<I&1 6&A5:" may perhaps be more appropriate. :very contract of insurance proceeds on the basis that the duty of disclosure has been discharged by the proposed assured, and the failure to discharge it renders the contract 36I<A@ : at the instance of the insurer. Presumed knowledge #he duty of making disclosure is not confined to such facts as are within the actual knowledge of the assured. It e"tends to all material facts which he ou7h in the ordinary course of business o HA1E ;NOWN, and he cannot escape the consequences of not disclosing them on the ground that he did not know them. #his was stated by 1ockburn, .! in *ROUDFOOT v MONTEFIORE ')*/>(. #here is, however, no duty to disclose 7A1#& which the assured <I< 96# 896;, and which he could no $e reasona$l! e<%ec ed o #no& at any material time. In )OEL v LAW UNION AND CROWN INSURANCE CO. 7letcherB 2oulton, .! stated$ "@ut the question always is$ ;as the knowledge you possess such that you ought to have disclosed it, et me take an e"ample. I will suppose that a man, as is the case with most of us, occasionally had a headache. It may be that a particular one of these headaches would have told a brain specialist of hidden mischief. @ut to the man it was an ordinary headache undistinguishable from the rest. 9ow, no reasonable man would deem it material to tell an insurance company of all the casual headaches he had had in his life, and, if he knew no more as to this particular headache than that it was an ordinary casual headache, there would be no breach of his duty towards the insurance company in not disclosing it. -e possessed no knowledge that it was incumbent on him to disclose, because -: 89:; 67 96#-I9E ;-I1- A 5:A&69A@ : 2A9 ;6A < <::2 2A#:5IA , or of a character to influence the insurers in their action. It was what he did not know which would have been of that character, but he cannot be held liable for nonB disclosure in respect of facts ;-I1- -: <I< 96# 896;" In 0LAC;0URN9 LOW AND CO+ v 1I,ORS ')**>( ord -alsbury stated that, where a fact could have been discovered by the assured if he had made reasonable enquiries, he is guilty of a breach of duty towards the

'b(

insurers who would be entitled to avoid the policy. #his is so because his ignorance was due to his in en ional failure to make such enquiries as he might reasonably have been e"pected to make in the circumstances. ;here the assured4s failure to make is unin en ional, the policy is equally liable to be avoided on the ground that it is inconsistent with his duty towards the insurers to have neglected to make them. ;hether he had failed in his duty will in each case depend on the circumstances of the case. A7en 2s #no&led7e i"%u ed o %rinci%al If the proposed assured employs an agent to represent him during the negotiations leading up to the policy, it is the duty of the agent to disclose to the insurers all "a erial fac s which are within his knowledge, however acquired, or which ought to have come to his knowledge in the ordinary course of business. #he 2arine Insurance Act '1ap ?.0( s.)...... Provides that$ "....;here an insurance is effected for the assured by an agent, the agent must disclose to the insurer B :very material circumstance which is known to himself, and an agent to insure is deemed to know every circumstance which in the ordinary course of business ou7h o $e #no&n, or to have been communicated to him..." Any failure to discharge this duty, whether by nonBdisclosure or by misrepresentation, entitles the insurer to avoid the policy as against the proposed assured, since he has delegated the duty of disclosure to his agent and is responsible for the manner in which it is performed. GIn 0LAC;0URN LOW > CO v 1I,ORSG ord 2acnaghten e"pressed the view in a case of marine insurance, that concealment by an agent is not a case of knowledge i"%u ed to the principal but is a direct breach of duty on the part of the agent who is, equally with the principal, bound to disclose all material facts within his knowledge. It is, therefore, immaterial whether the agent was guilty of an intentional concealment or of fraud or whether he did not disclose a particular fact $ecause he hones l! hou7h i &as no "a erial, as in ;RANT: v ALLAN ').F)(, where the agent made a $ona fide mistake in a burglary insurance. It is equally immaterial whether the proposed assured e"pressly instructed the agent to disclose the fact in question or whether he gave the agent general instructions to disclose all material facts and keep nothing back, or whether he simply left everything to the agent and did not know that he had not performed his duty, as illustrated by RUSSELL v THORNTON where the assured sent a copy of a letter which he received during the negotiations, and which contained material facts to the agent, who did no communicate it to the insurers. It is the duty of the proposed assured, since he appoints the agent to represent him in the negotiations and to perform the duty of disclosure on his behalf, to place the agent in possession of all the material facts which the proposed assured would have been bound to disclose to the insurers, if he himself had been conducting the negotiations. In 1ALLANCE v DEWAR ')*0*(, ord :llenborough, 1.! stated, in a marine insurance case$"#he rule is that the broker must communicate what is in the special knowledge of he assured". An omission or misstatement on the part of the agent which, if ?ud7ed solel! fro" he a7en 3s s a e of #no&led7e, would have 96 :77:1# 69 #-: 3A I<I#= 67 #-: P6 I1= may, &hen he %ro%osed assured3s #no&led7e is i"%u ed o

he a7en 9 amount to nonBdisclosure 'as in We$s er v Fos er where the insurers asked questions which the agent was unable to answer( or misrepresentation 'as in 0UFE v TURNER where the assured, immediately after a fire on adjacent premises had been apparently e"tinguished sent instructions by an e"traordinary conveyance to his AE:9# to effect an insurance, but omitted to mention the fire, which broke out again and destroyed the assured4s premises(. In such a case, the insurer is entitled to avoid the policy. It is immaterial whether the proposed assured neglected to communicate his knowledge to the agent because he did no hin# he #no&led7e "a erial, or whether he designedly employed an agent who was ignorant of the truth. Wha are @Ma erial Fac sA( #he :nglish courts developed various tests which have been adopted by 8enya courts in order to ascertain what facts are to be regarded as material. #he test which is usually applied is whether the nonBdisclosure of the facts would influence a "prudent" insurer, 'though in some cases the term "reasonable" has been substituted for "prudent"(. Another test is whether a "reasonable" assured would consider them material. In no case is it relevant to consider whether the nonBdisclosure would influence he %ar icular insurer concerned or whether the assured himself thought that the facts were material. In )OEL v LAW UNION AND CROWN INSURANCE CO+ 7letcherB 2oulton, .!. stated$ "#he disclosure must be of all you ou7h o have realised o $e "a erial, not of that only which you <I< I9 7A1# realise to be so..... =our opinion of the materiality of that knowledge is of no moment. If a reasonable man would have recognised that it was material to disclose the knowledge in question, it is no e"cuse that you did not recogniHe it to be so". '*ruden Insurer Tes ( As far as marine insurance is concerned, s.)* 'F( of the 2arine Insurance Act '1ap ?.0( provides that$ "A circumstance is material if it would influence the judgment of a %ruden insurer in fi"ing the premium, or determining whether he will take the risk" 5egarding the meaning of the term "prudent insurer" Atkin, ! in Associa ed Oil Carriers L d v Union Insurance socie ! of Can on L d ').>F( F 8.@.)*+ stated$ ".....#here seems no reason to impute to the insurer a higher degree of knowledge and foresight than that reasonably possessed by the more e"perienced and intelligent insurers carrying on business in that market at that time". #he only test of materiality of a fact is whether the nonBdisclosure of the fact would influence a "prudent" insurer. ;hether it would influence the particular insurer concerned is irrelevant. In :urich ,eneral Acciden and Lia$ili ! Insurance Co+ L d v Morrison, 2ackinnon, .!. stated$ 'Wha is "a erial is ha &hich &ould influence he "ind of a %ruden insurer in decidin7 &he her o acce% he ris# or fi< he %re"iu"9 and if this be proved it is not necessary further to prove that the mind of the actual insurer was so affected. In other words, the assured could not rebut the claim to avoid the policy because of a material

representation by a plea that the particular insurer concerned was so stupid, ignorant, or reckless, that he could not e"ercise the judgment of a prudent insurer and was in fact unaffected by anything the assured had represented or concealed". It is also the rule that the assured4s opinion as to whether the fact 96# <I&1 6&:< is material is irrelevant. In LINDENA1 v DES0OROU,H ')*F*( @ayley, !. stated$ "#he proper question is Iwhether any particular circumstance was in fact material,4 and not &he her he %ar ! $elieved i o $e so. #he contrary doctrine would lead to frequent suppression of information, and it would often be e"tremely difficult to show that the party neglecting to give the information thought it material". #his rule is illustrated by the decision in ,odfre! v 0ri annic Assurance Co+ L d ')./?( in which the facts, briefly, were as follows. #he assured under a life policy had been told that he might have minor kidney trouble and should take care. ater he was told that the kidney condition was unchanged and that an JBray showed lung infection which would probably clear up with treatment. -e also suffered from attacks of pharyngitis. 9one of these facts was disclosed to the insurance company when the proposal was signed, because the proposed assured did not deem it necessary to tell the insurers about them. It was held that these facts were material facts, and the company could avoid liability under the policy, because the assured as a reasona$le "an &i hou an! s%ecialis #no&led7e, should have appreciated that he %ossessed #no&led7e of his heal h ;-I1;A& 67 2A#:5IA I#= to the company. NOTE= In !anuary ).K> the aw 5eform 1ommittee 'A8( in their Fif h Re%or recommended "that for the purpose of any contract of insurance no fact should be deemed material unless it would be considered material $! a reasona$le insured$ 'parag.)+( #hey wondered whether the insuring public at large is aware of the legal rule regarding nonBdisclosure and the fact that the rule entitles the insurers to 5:PA<IA#: IA@I I#= whenever they can show that a fact within the knowledge of the insured was not disclosed by him. #hey noted that "a fact may be material to insurers, in the light of the great volume of e"perience of claims available to them, which would not a%%ear to a proposer for insurance, however honest and careful, to be one which he ought to disclose." Ma eriali ! is a 4ues ion of fac ;hether a particular fact is material depends upon the particular circumstances of the particular case. It does not necessarily follow that because a fact has been held to be I22A#:5IA in one case, a similar fact is no "a erial in another. At the same time, similar circumstances may be assumed to be equally material or immaterial, whatever the nature of the insurance. #he question is one of fact to be decided, if necessary, by the judge hearing the case after receiving relevant evidence. '&ee 2arine Insurance Act s.)* '+((. Ti"e of "a eriali ! #he materiality of a fact is determined by reference to the date at which it should, if at all, have been communicated to the insurers. If at that date the fact was material its nonB disclosure is a ground for avoiding the contract, notwithstanding that it afterwards turns out to be immaterial, or indeed untrue.

6n the other hand, the nonBdisclosure of a fact which was not at that date material, and which was, therefore, not a fact to which the duty of disclosure then attached, does not affect the validity of the policy, even though the fact af er&ards becomes material and actually brings about the loss$ WATSON v MAINWARIN, ')*)?( in which the proposed assured was suffering and ultimately died of a disease which was not generally a "disorder tending to shorten life" within the meaning of the proposal. Ma ers &hich need no $e disclosed 7acts which would, in ordinary circumstances, be material, may become immaterial in the special circumstances of the case% and the assured is then under no obligation to disclose them. 7acts which may thus become immaterial may be grouped under the following classes$ 'a( 'b( 'c( 'd( 'e( 'f( 'g( 'h( 7acts which are known to the insurers or which they may reasonably be presumed to know. 7acts which they could have discovered by making enquiry. 7acts as to which they waive information. 7acts tending to lessen the risk. 7acts the disclosure of which is unnecessary by reason of a condition. '&ee he Marine Insurance Ac 9 s+BC 6D8. Provisions or propositions of law. Anknown facts. 2atters of public notoriety.

The dura ion of he du ! of disclosure #he duty of disclosure continues throughout the negotiations and until at least the contract has been completed by acceptance$ RE .A,ER AND ,UARDIAN ASSURANCE CO+ LTD 1hannell !. stated$ "#he time up to which it must be disclosed is the time when the contract is concluded. Any material fact that comes to his knowledge $efore the contract must be disclosed". In WHITWELL v AUTOCAR FIRE AND ACCIDENT INSURANCE CO+ LTD ').F>( B In a proposal form for motorBinsurance there was a question which asked the proposer whether any insurance company had <:1 I9:< his insurance. -e gave the answer "96". #his was in fact a true statement at the time at which he made it. @ut in fact, quite unknown to him, two days before the proposal was accepted another insurance company had declined to insure him. It was held that here &as no du ! to disclose this fact A7#:5;A5<& because the contract was concluded when the proposal was accepted. The effec of non5disclosure In CARTER v 0OEHM which was a case involving marine insurance it was held that a failure on the part of the assured to disclose a material fact within his actual or imputed knowledge renders the policy 36I<A@ : at the option of the insurers. #his is so whether the failure to disclose is attributable to fraud, or carelessness, inadvertence, indifference, or mistake, error of judgment, or even to his failure to realiHe that the fact is material. Ignorance of a fact which he ought to have known and, hence, disclosed, will also render the policy voidable at the option of the insurers. As far as marine insurance is concerned s.)* ')( of the 2arine Insurance Act '1ap.?.0( states$ "&ubject to this section, the assured must 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". Misre%resen a ion A representation is a statement of fact made by one party to the contract 'the representor( to the other 'the representee( which, while not forming a term of the contract, is yet one of the reasons that induces the representee to enter into the contract. A misrepresentation is a representation that is A9#5A:. A statement of belief or opinion as to a particular fact is not a representation. At common law, a misrepresentation may be$ 'i( 'ii( 7raudulentLif it was made knowingly, recklessly or without belief in its truth% or InnocentLif the maker honestly believed it to be true. A misrepresentation, whether fraudulent or innocent, renders a contract 36I<A@ : at the option of the person to whom the misrepresentation was made$ Derr! v *ee#. #his applies equally to insurance in cases where representations have been made by one of the parties during the negotiations with a view of inducing the other party to enter into the contract. -ues ions and Ans&ers #he insurers may, at any time during the negotiations, ask the assured questions as to any matters upon which they require information. In practice, a list of printed questions in the proposal form is usually submitted to him to answer in writing. In addition, he may be asked other questions on specific matters not covered by the questions in the proposal form. &uch questions may be put and answered in writing or verbally B as in )oel v La& Union and Cro&n Insurance where ans&ers to questions put by the medical e"aminer &ere &ri en do&n $! hi"9 and signed by the proposed assured. The effec of he 4ues ions In DAWSONS LTD v 0ONNIN ').FF( F A.1.+)? it was stated that, notwithstanding the questions that the insurers ask, the 1ommon aw duty of disclosure remains on the P56P6&:5 and he "us disclose "a erial fac s &hich are no covered $! he 4ues ions+ -owever, &crutton, .!. observed in NEWSHOLME 0ROTHERS v ROAD TRANS*ORT AND ,ENERAL INSURANCE CO+ LTD ').F.( F 8.@.?K/ that "the insurance companies also run the ris# of the contention that matters they do not ask questions about are not material, for, if they were, they would ask questions about them". 6n the other hand$ "It is unquestionably plain that questions in a proposal form may be so framed as necessarily to imply that the underwriter only wants information on certain subjectBmatters, or that within a particular subjectBmatter their desire for information is restricted within the narrow limits indicated by the terms of the question, and, in such a case, they may %ro an o dispense the proposer from what otherwise A# 162269 A; would have been a duty to disclose ever! hin7 "a erial" 'per Asquith, .!. in SCHOOLMAN v HALL, ').K)( ) loyd4s 5ep.)?.,1.A(. An e"ample of this effect of the questions is to be found in )ESTER50ARNES v LICENCES AND ,ENERAL INSURANCE CO+ LTD ').?+(, +. I. . 5ep.F?), where 2ackinnon, !. stated 'obiter( that if an insurance company had asked a proposer the question "-ave you or your driver

durin7 he %as five !ears been convicted of any offence," and he had said "96", and that was true, he would have come without any hesitation to the conclusion that the company was not entitled after asking that question and receiving the true answer, to take it to mean that he had failed to disclose that he had been convicted ei7h !ears a7o, and that that was a material fact. The effec of he ans&ers #he effect of the proposer4s answers will depend upon whether there is or is not a "basis" clause in the proposal form. Where here is a '$asis' clause #he result of the presence of a "basis" clause in a proposal form is to render irrelevant any question either of the "a eriali ! of he infor"a ion 7iven herein9 or he hones ! or care with which it is given. If the answer given is inaccurate, the insurers are at liberty to repudiate the policy. In addition, he %ro%oser re"ains under he co""on la& du ! o disclose "a erial fac s &hich are no s%ecificall! covered $! he %ro%osal for"+ #he effect of a basis clause is illustrated by DAWSONS LTD v 0ONNIN ').FF(. Where here is no '0asis( clause ;here there is no condition making the proposal the "basis" of the contract, the inaccuracy of the answers does not entitle the insurers to repudiate liability unless it amounts to the 969B<I&1 6&A5: 65 2I&5:P5:&:9#A#I69 of a "a erial fac . A fraudulent representation relating to a material fact avoids the contract. If the fact is not material, the validity of the contract is not affected. As far as marine insurance is concerned, the insurer is entitled to avoid liability on the policy, whether the misrepresentation is 75AA<A :9# or innocent. &ection F0 ')( of the 2arine Insurance Act '1ap ?.0( states$ ":very "a erial re%resen a ion made by the assured or his agent to the insurer during the negotiations for a contract of marine insurance, and before the contract is concluded, "us $e rueE and if any such representation is un rue the insurer may A36I< #-: 169#5A1#". Insura$le in eres Another fundamental principle of insurance law is the concept of "insurable interest". #he general rule is that a policy of insurance would be void as constituting a &a7er if the proposer had no insurable interest in the life or property insured. <efinition In Lucena v Craufurd 6BCFG8 '-ouse of ords(, awrence !. stated$ "A man is interested in a thing to whom advantage may arise or prejudice happen from the circumstances which may attend it... and whom it importeth that its condition as to safety or other quality should continue... having some relation to, or concern in the subject of the insurance, which relation or concern by the happening of the perils insured against may be so affected as to produce a damage, de ri"en or prejudice to the person insuring% and where a man is so circumstanced with respect to matters e"posed to certain risks or damages, or to have a moral certainty of advan a7e or benefit, but for those risks or dangers, he may be said to be in eres ed in the safety of the thing".

#his definition forms the basis of s.K 'F( of the 2arine Insurance Act '1ap.?.0( which provides$ "In particular, a person is interested in a marine adventure where, he stands in any legal or equitable relation to the adventure or to any insurable property at risk therein, in consequence of which he may benefit by the safety or due arrival of insurable property, or may be prejudiced by its loss, or by damage thereto, or by the detention thereof, or may incur liability in respect thereof" 'a( A direct relationship between the insured and the subject matter 'b( #he insured is directly responsible for any loss arising 'c( #he insured has a legal or equitable interest or right in the subject matter 'd( #he insuredMs interest in the subject matter is capable of financial or pecuniary estimation or quantification Ti"e for insura$le in eres #he rules relating to insurable interest are as follows$ ). In case of marine insurance, the 2arine Insurance Act '1ap.?.0(, s./ ')( provides that$ "#he assured must be interested in the subjectBmatter insured at the time of the loss, though he need not be interested when the insurance is effected". F. In the case of life assurance, the interest must e"ist at the time the policy is effected, and it need not continue thereafter. #he other rules are as follows$ 'a( 'b( I ii A woman has an unlimited interest in life of her husband$ REED v RO.AL E/CHAN,E ASSURANCE CO+ ')>.K(, Peake Add. 1as.>0. 'd( A lady has an insurable interest in the life of her fiancN, for his contract to marry her is recogniHed by the common law as having pecuniary value, and the remedy for breach of promise to marry is in damages. &imilarly, a man has an insurable interest in the life of his fiancNe. At common law, a child has no insurable interest in the life of his parent, and vice versa. Harse v *earl Life Insurance Co+ L d+ Ouestion$ &hould the 8enya law be changed to allow a parent to have an insurable interest in the life of his child who supports him B the interest to be insured being limited to the amount which is necessary to protect the parent against the contingency of the death of the child, #hat change, if made, would make 8enya law correspond to the law in &cotland where a parent has a right to be supported by his child. A creditor has an insurable interest in the life of the debtor to the e"tent of the debt$ ,odsall v 0oldero ')*0>(, . :ast >F. &ee <alby4s case. A person has an unlimited interest in his own life. A man has an unlimited interest in the life of his wife$ ,RIFFITHS v FLEMIN, ').0.( I8.*0'c(

'e(

'f(

'g(

A master has an insurable interest in the life of his servant to the e"tent of the value of the services agreed to be rendered$ &imcock v &cottish Imperial Insurance 1o. ').0F( )0 &. .#.F*/. A servant has an insurable interest in the life of his master to the e"tent of his remuneration for the agreed period of service, if the contract of employment is for a fi"ed duration, or the agreed period of notice in other cases$ He$don v Wes ')*/?( ?@ and &.K>.. B An employee who was to be employed for > years at a salary of P/00 per annum effected a policy on his employer4s life, F years after the employment commenced, for PFK00. #he employer died and he claimed the sum insured. It was held that he had an insurable interest in the employer4s life to the e"tent of the value of the salary for the 5:2AI9I9E #:52 67 :2P 6=2:9#.

'h(

Su$ro7a ion ;here one person has a claim against another, a third person is, in certain circumstances, allowed to have he $enefi of he clai" and he re"ed! for enforcin7 i 9 although it has not been assigned to him, and he is then said to be su$ro7a ed to the rights of the first person ')+ -alsbury4s aws '?rd :d.(/)*(. ;here the insurer pays for a total loss, either of the whole, or in the case of goods of any proportionate part, of the subject matter insured, he thereupon becomes entitled to take over the interest of the assured in whatever may remain of the subject matter so paid for, and he is thereby subrogated to all the rights and remedies of the assured in and in respect of that subject matter as from the time of the casualty causing the loss. &ubject to the foregoing, where the insurer pays for a partial loss, he acquires no title to the subject matter insured, or such part of it as may remain, but he is thereupon subrogated to all rights and remedies of the assured in and in respect of the subject matter insured as from the time of the casualty causing the loss, in so far as the assured has been indemnified by the insurer for the loss. 'FF -alsbury4s aws '?rd :d.( )/0(. In Cas ellain v *res on @rett, .!. stated$"In order to apply the doctrine of subrogation, it seems to me that the full and absolute meaning of the word must be used, that is to say, he insurer "us $e %laced in he %osi ion of he assured+ 9ow it seems to me that in order to carry out the fundamental rule of insurance law, this doctrine of subrogation must be carried to the e"tent which I am now about to endeavour to e"press, namely, that as $e &een he under&ri er and he assured he under&ri er is en i led o he advan a7e of ever! ri7h of he assured9 whether such right consists in contract, fulfilled or unfulfilled, or in remedy for tort capable of being insisted on or already insisted on or in any other right, whether by way of condition or otherwise, legal or equitable, &hich can $e9 or has $een e<ercised or has accrued9 and whether such right could or could not be enforced by the insurer in the name of the assured $! he e<ercise or ac4uirin7 of &hich ri7h or condi ion he loss a7ains &hich he assured is insured9 can $e9 or has $een di"inished++++ @ut it will be observed that I use the words Iof every right of the assured4". Inde"ni ! #he concept of indemnity was e"plained by @rett, !. in Cas ellain v *res on as follows$ "#he very foundation, in my opinion, of every rule which has been applied to insurance law is this, namely, that he con rac of insurance con ained in a "arine or fire %olic! is a con rac of inde"ni !9 and of inde"ni ! alone9 and that his con rac "eans ha

he assured9 in case of a loss a7ains &hich he %olic! has $een "ade9 shall $e full! inde"nified9 $u shall never $e "ore han full! inde"nified'+ #his means that the assured would be co"%ensa ed for the actual loss he has suffered up to the sum insured. 7or e"ample, if 8amau insures his house for one million shillings and it is burnt down, if &hs)00, 000 will restore it, then he may claim &hs)00, 000 and no more. If, due to inflation, it will cost two million shillings to restore it, then he can only claim one million shillings 'the sum insured(. -e can never recover more than the sum for which the property is insured. Dou$le Insurance "<ouble insurance" arises where a person effects more than one insurance with different insurers on the same risk and interest, and he su"s assured e<ceed he value of he %ro%er ! insured+ E<a"%les= 'i( J insures property worth P)0,000 with 1o. A for P>,K00 and 1ompany @ for PK,000. #his is double insurance because the value of the property, P)0,000, has been e"ceeded. J insurers the property 'above( with 1ompany A for P+,K00 and 1ompany @ for PK,K00. #his is not double insurance because the aggregate sums insured do not e"ceed P)0,000 'the value of the property insured(. #he principle of double insurance is intended to safeguard the indemnity principle, by ensuring that the insured does not recover more money than he has lost by the simple devise of insuring with different insurers and recovering the insured amount from each one of them.

'ii(

Con ri$u ions and a%%or ion"en ;here there is more than one policy enforceable at the time of loss covering the same subject matter, risk and interest the insured may recover the total loss from either insurer. Any insurer who pays more than his share may claim a contribution from the others in proportion to the sum insured with each. E<a"%le= J insures property worth P)0,000 with 1ompany A for P+,K00 and 1ompany @ for PK,K00. #he property is damaged to the e"tent of P),000. J can recover the P),000 from either A or @ 1ompany, and the other company would then pay to the company which has compensated J in the ratio .$)). Condi ions for Con ri$u ion 'i( 'ii( 'iii( 'iv( #here must be more than one policy on the same subject matter and risk All must be taken out by the same person All must be legally binding and in force 9one of the policies should e"empt itself from liability to contribution

Avera7e clause If the policy contains what is known as the "subject to average clause", the assured can only recover such proportion of any loss as the amount insured bears to the value of the

property insured. #his will occur if property is insured for an amount which is less han i s value and the property is %ar iall! des ro!ed+ E<a"%le= J4s building worth P)00,000 is insured for P)0,000. #he building is damaged to the e"tent of P)0,000. If the policy contains a "subject to average clause, J can only recover P)00. #he amount payable is calculated on the basis of$ I.3 " oss )0,000 " ),000 A.3 )0,000 Q 9ote$ I.3 Q Insured 3alue A.3 Q Actual 3alue In such a case, the insurer and the insured are regarded as sharin7 he loss+ If the policy does not contain an average clause, the insured can recover the whole loss he has suffered up to the e"tent of the amount insured 'in the above e"ample, P),000(. #he average clause is inserted by insurance companies as a means of compelling the owner of the property to insure it up to its full value. In that case the premium payable increases and, of course, the insurer4s premium income also increases. It should be remembered that, as a general rule, ver! ver! fe& properties covered by insurance policies are actually damaged or destroyed. Reinsurance 5einsurance occurs if an insurer who has already insured specific property insures it with another insurer, usually a larger company. #his is done in order to spread the risk over a number of insurers. #he person originally insured has rights only against the insurer who has issued the policy, due to the privity of contract rule. Assi7n"en 'i( A contract of fire insurance can be assigned only with the consent of the insurers. If they refuse to give the consent, no assignment can take place$ SADDLERS3 COM*AN. v 0ADCOC; 6BHID8+ A life policy may be assigned by endorsement on the policy or by a separate instrument. ;ritten notice of the assignment must then be given to the insurer under s.? of the ':nglish( Policies of Assurance Act )*/> 'which is a prima facie applicable in 8enya(. P)00

'ii(

T!%es of Insurance #he types of insurance which are generally available are$ i. Life assurance #his is a contract by which the insurer, in return for either a lump sum or periodical payments, undertakes to pay the person for whose benefit the policy is effected, a sum of money$

'a( 'b(

6n the death of the person whose life is insured, or 6n a specified date, or on the death of the person whose life is insured, whichever happens first.

In the case of 'a(, the policy is called a Whole life %olic!+ In the case of 'b(, the policy is called an endo&"en %olic!+ In Dal$! v The India and London Assurance Co+ it was e"plained that a life assurance policy is no a con rac of inde"ni !+ #his is because a human being has no market value. Fire insurance A fire insurance contract is intended to cover loss caused by fire during a specified period. #he word "fire" is usually defined in the policy. A fire insurance policy is a contract of indemnity. Mo or 1ehicle Insurance A motor vehicle insurance contract is one effected pursuant to the 2otor Insurance '2otor 3ehicle #hird Party 5isks( Act to cover any liability which a motorist may incur as a result of causing the death or injury of a third party 'including other motorists(. #he third party has a statutory right to sue the insurer direct, and is not affected by the privity of contract rule. iv. 0ur7lar! insurance A burglary insurance is a contract to indemnify the assured against loss arising from burglary. &uch a policy would be voidable at the option of the insurer if the property insured is deliberately overvalued. Acciden insurance An accident insurance is a contract by which the insurer agrees to pay a specified sum of money upon the happening of certain events, usually death of the insured in an accident. A smaller sum is usually payable in the event of the insured4s disablement 'total or partial(, either on a monthly or weekly basis. An accident insurance is no a contract of indemnity.

ii.

iii.

v.

Re7ula ion Insurance business is regulated in 8enya by the Insurance 1ompanies Act under which persons carrying on insurance business as insurers need the authoriHation of the Co""issioner of Insurance who has very wide powers of regulation and investigation.