DMII MNRB SCHOLARSHIP & PUBLIC PROGRAM [DECEMBER 2011 INTAKE ] SUBJECT

105 LAW

Assignment No 5

Chapters 9 to 12

December, 2011

Answer all 5 questions.

Total 100 marks
(as far as possible, use your own words to elaborate the points )
1.

a)

Why does the law allow subrogation? Explain

(10 marks)

Subrogation is a broad concept that falls under the category of equitable remedies.
The right of subrogation allows a person, having indemnified another under a legal
obligation to do so, to stand in the place of that other and avail himself of all the rights
and remedies of that other, whether already enforced or not.
Thus the main purpose of subrogation is to allow the substituted party (the
subrogee) to obtain reimbursement for payments made in connection with the legal
claim. The original creditor is called the subrogor and forfeits their right to recovery
to the subrogee. The subrogee is said to step into the shoes of the subrogor.
In the insurance context, subrogation refers to the right of an insurer who has
indemnified an insured in respect of a particular loss (i.e. paid a claim) to recover all or
part of the claim payment by taking over any alternative right to indemnity which the
insured possesses.
There are two key underlying principles to bear in mind when dealing with
subrogation.
The first is that subrogation is a doctrine founded on the indemnity principle, namely
that an insured has a right to be indemnified against his loss but cannot make a profit
from it by getting paid his insurance money as well as obtaining compensation from a
third party.
By way of example and as illustrated by one of the leading subrogation cases,
Castellain v
Preston [1883] 11 QBD 380, if an insured vendor of a property suffers fire damage
between
exchange and completion and is indemnified by his insurers, the insured must then
account back to insurers when the sale of the house is completed and he receives the
full purchase price to which he was entitled in spite of the fire
The law allows subrogation to prevent the guilty party from being left off the hook or
to prevent unjust enrichment. It is a doctrine in favour of the underwriters or insurers
in order to prevent the assured from recovering more than a full indemnity.
The doctrine of subrogation is a corollory to the principle of indemnity and as such
does not applies to non-indemnity contracts.

b)

Discuss briefly the extent of recovery by an insurer by way

of subrogation if the amount recovered from the third party is
less than the loss.(10 marks)

In some cases the recovery from the 3 rd party will be less than the loss that has been
suffered by the insurer. This may happen, if the 3 rd party is insolvent or simply unable
to pay. If the insurers have paid for the whole of the loss then they would be entitled to
keep the whole of the sum that has been recovered.
However, if the insured have not paid the whole of the loss, because, for example, the
policy is subject to an excess, a difficult question arises. Until Napier v. Hunter (1993)
there was no clear answer. It appears from the decision, however, that the insurers
could keep the whole 4000, even though the insured has not been fully indemnified.
Apparently, this is because the insured, in accepting an excess, has agreed to bear the
first 250 of any insured loss himself, giving the insurers 1 st claim on the money that is
recovered. This part of the decision in Napier is controversial.
Nevertheless the same case will appear in a case of under insurance. For instance, in
Napier case the insurers might have paid only 4750 of the 5000 loss because the
sum insured was limited to the former amount. In this case the insurers could
probably, again, keep the whole of any recovery that was less than 4750. It seems
that this principle would apply to uninsured losses that were completely outside the
policy coverage and would not have been paid even if there had been no excess or
under insurance. It is clear that the insured can deduct from any amount to which
the insurer is entitled by way of subrogation, any legal costs or other expenses
reasonably incurred in attempting to recover the loss that was insured e.g. England v.
Guardian Insurance Ltd (2000)
2.

What is assignmentin an insurance contract.

(20 marks)

Assignment is concerned with the transfer to another person, of the rights that exist
under contracts and in some cases, the transfer of duties.
Some classes of insurance are frequently assigned i.e.
Life Insurance assignment is governed by Policies of Assurance Act 1867
Marine Insurance assignment is governed by S 50 Marine Insurance Act 1906
There

are three types of assignment:

assignment of the subject-matter of the contract
assignment of the benefit of the contract
assignment of the contract itself

Assignment of the subject-matter

E.g. sale of a car, or of a house - There is no automatic assignment of the insurance
policy.
The usual effect will be to bring the contract to an end, as the insured no longer have
insurable interest in the property.

 Assignment of the benefit of the contract

This is where the right to recover money under an insurance contract is assigned to
another person. It is a chose in action (not a chose in possession). The entire contract
is not assigned, merely the benefit of it. There is no change in the subject matter of
contract or in any other aspect of the risk.
Such assignment can be done in two ways:
statutory assignment in conformity with S 136 Law of Property Act 1925
an equitable assignment
The rules involved in these types of assignment are:
o Notice must be given to the insurer
o Without such notice, assignee can only enforce against the assignor
o Consent of the insurer is not necessary
o Assignment can take place either before or after a loss
o Assignee need not have insurable interest in the subject-matter
Assignment of the contract itself
Subject to limiting factors as follows:
Personal contracts are not freely assignable
Personal Contracts are not freely assignable as the terms of the cover granted
to the insured by the insurer will often depend on the insureds own personal
characteristics. e.g. Motor insurance, property insurance & liability insurance.
Since the risk depends on the identity of the insured in these cases, the policy
cannot be assigned without the consent of the insurer. In Peters v. General
Accident Fire and Life Assurance Corporation Ltd (1938): the seller of a van
handed over his insurance policy with the vehicle and the buyer subsequently
injured the claimant. The court held that the insurers were not liable to satisfy
the judgment because the policy could not be assigned without their consent.
In practice, insurers are unlikely to grant such consent and will usually provide
insurance only under a new contract. Assignment must take place at the time
when property is transferred. If a policy is assigned when the property it covers
is sold, the assignment must take place at the same time as the sale. This is
because the policy will normally lapse automatically if the subject matter is
disposed and there will be no contract to assign once the sale has taken place.
A new contract will have to be formed involving fresh offer, acceptance and
consideration.
Where, exceptionally, the policy expressly states that
assignment is permitted; it may also impose contractual terms as to how and
when notice of assignment must be given.
Marine Insurance
Due to the limitations, few insurance contracts are freely assignable in practice.
However, Marine Cargo policies are an exception.The ownership of cargo may
change several times in the course of a voyage, and it is convenient if the
insurance cover can be easily transferred at the same time.

Normally, the risk will not alter as a result of a change in ownership of goods
since they remain on the same ship. A Cargo Policy is therefore not a personal
contract and there is no reason why such assignments should not take place.
Marine Hull Policies are not freely assignable bcos the ownership of a vessel will
obviously affect the risk. Assignment of Marine policies is governed by section
50 of the Marine Insurance Act 1906.
Assignment of Life Policies
Life insurance provides a means of investment as well as a source of protection,
and many life policies acquire a cash (or surrender) value once a certain number
of premium have been paid. Life policies are freely assignable because,
provided the identity of the life insured does not change on assignment, there is
no change in risk.
To illustrate this, let us suppose that A has a policy on his own life. A is the
insured the policyholder who will benefit from the policy money when it
matures, or whose estate will benefit when he dies. A is also the life insured in
other words As life is the subject matter of the contract and the death of A is
the event on which the sum insured is payable. If A assigns the policy to B, the
life of A remains the subject matter of the contract and the policy money is still
payable on the death of A, and not of B. When policy is assigned, B may
become the insured under the policy and entitled to the policy money: A
however, remains the life assured. The key point here is that the risk does not
change when the contract is assigned.
3.

In relation to the duty of disclosure under the law of agency, what is

imputed knowledge? (20 marks)

In the law of agency, notice of facts brought to the attention of an agent (a person
authorized by another, known as a principal, to act for him or her), within the scope of
the agent's authority or employment, is usually imputed to his or her principal.
An action that is carried out by an agent is treated in law as the principal`s own action.
Therefore the principal become generally liable for his agent`s deeds and can be
bound in contract by the agent. This is somewhat expressed in the maxim `qui facit
per alium facit per se` - what is done by an agent is deemed to have been done by his
principal. for e.g. an insurance broker will often be required to pass on information
about a risk, which he has acquired from the insured to the insurer. Under the law of
agency any knowledge which an agent posse is imputed knowledge to the principal. in
other words, the law assumes that the principal is aware of information which has
been given to the agent or put it in another way, what is known by the agent is
deemed to be known by the principal. this is of particular importance in relation to the
duty of disclosure.

4.

Under what circumstances is an agent acting as agent of the proposer?

(20 marks)

An agent is the agent of the proposer:

when an agent gives general advice to the proposer as to the cover he requires
and the market in which he should place his business
if no authority is given by the insurers and the only recognition he receives from
the insurers is the payment of commission - Bancroft v Heath (1900)
when he fills in, alters, or adds to the answers in a proposal form, and the
proposer knew or ought to have known of this - Newsholme
Bros v Road
Transport & General (1929)
when he completes a form on the proposers behalf and the form incorporates a
wording to the effect that if the form is completed by someone other than the
proposer, that person is deemed to be the agent of the proposer Facer v
Vehicle & General Ins. Co. Ltd (1964)
when he and the proposer are in collusion to defraud the insurers
when the agent gives the insured advice about how to formulate his claim
5.

a)

Briefly explain salvage and abandonment in the context of

marine insurance.
(10 marks)

In marine insurance, there is long established principal there, where the insured has
been paid for a total loss, the insurer is entitled to claim, for their own benefit,
anything that remains of the insured subject matter. The action of giving up the
subject matter ti the insurer is reffered to as abandonment and the right of the insurer
to take over the subject matter is known as salvage. In marine insurance, salvage and
abandonment are particularly important because marine insurance recognizes not only
actual total losses (where the subject matter is destroyed), or cease to exist, or the
insured is irretrievably deprived of it) but what are known as a constructive total
losses. (subject matter is not destroyed but the insured is deprived of the possession
of their ship or goods and :
It is unlikely that they can recover the ship pr goods or

The cost of recovering the ship or goods would exceed their value where
recovered.
Where there is actual total loss under a marine policy, abandonment is automatic,
however, in the case of a constructive total loss, the insured must serve a notice of
abandonment on the insurers if they wish to be paid for a total loss. This is a formal
notice indicating the isnured`s willingness to give up the subject matter to the
insurers.
b)

State and briefly explain four methods of providing indemnity

that are normally stated in the operative clause of an insurance
policy. (10 marks)

The four methods that of providing indemnity are:

i.

Payment of money

Insurance contract essentially is to pay money. Majority of the settlement will be in the
form of money because it is convenient and satisfactory method for both parties. For
liability insurance the cash payment is usually made to the 3 rd party and not to the
insured because they are settled between the 3rd party and the insurer. It is not
necessary for the insured when receiving the money used it for the restoration
purposes, he can in fact use the money as he pleases, however there will be usually a
commitment between the insured and a 3 rd party for instance he may be obligated on
repairing or rebuilding a house because of a clause in a lease, or mortgage deed.
Furthermore a failure by the insured to restore the property may affect the amount of
a claim settlement. Such like the old for new or the reinstatement basis, insurer will
only pay when the insured has actually replaced the said item. If not settlement will
be made on an ordinary indemnity basis.
ii.
Reinstatement
This is the choice of rebuilding the building instead of paying for it. Insurer rarely
exercises this option because they will be responsible right from the beginning of the
construction to the end of it, whereby if there is any defect or inferior to the old
property then the insurer may have to pay compensation to the insured for breach of
contract. If they choose so then they option of paying money to the insured will
change to provide i.e. building a building or machinery. Usually they will choose this
when they suspect but unable to prove fraud on the part of the insured If they have
chosen to reinstate they will only do so as circumstances permit and in a reasonably
sufficient manner. The policy will also state that that in no case shall the insurer be
obligated to expend more than the sum insured on reinstatement. They must also do it
in a reasonable time and are their own insurers (i.e. responsible if there is a fire during
reconstruction at the premises).
iii. Repair
Motor insurance is perhaps best known example, where motor repairers are commonly
authorized by insurer to carry out repair works on damaged vehicles. Some insurers
have taken this process a step further by acquiring ownership of garages which are
used to repair their policyholder`s vehicles. This practice is currently more common in
Euro dollar countries.
iv. Replacement
The most common are usually for plate glass policies, insurer choose to replace them.
These insurance companies would have strike deals with local plate glass supplier that
will provide them the glasses at a discounted price due to the fact that the insurer will
be placing many business with the company and will usually have standing agreement
with the company. Similar agreement could exist for other type of products.

Submission Date : on or before 29th December, 2011