GPR 424

THE NATURE AND DEFINITION OF INSURANCE AND INSURANCE LAW

HISTORY

Origins of the modern insurance contract are to be found in the practices adopted by Italian
merchants from the 4th Century. This was instigated by the maritime risks. The risks of losing ships
and cargoes at the sea.

Insurance contract

Insurance may be described as a social device to reduce or eliminate risks or loss to life and
property. It is a provision man makes against inevitable contingencies, loss or misfortunes. Insurance
provides financial protection against a loss arising out of happening out of an uncertain event. A pool
is created through contributions made by persons seeking to protect themselves from common risk.
A great advantage of Insurance is that it spreads the risk of a few people over a large group of
people exposed to risk of similar type.

Definition

What is Insurance?

A contract of insurance is a contract whereby one person who is the insurer undertakes in return for
a greater consideration called premium, to pay to another person called the insured a sum of money
or its equivalent on the happening of a specific event. The event must have an element of
uncertainty about it. Concerning the uncertainty it may take the following formats:

a. In the case of life insurance, although the event is bound to happen in the ordinary
course of nature, the time is uncertain.
b. If the happening of the event depends upon accidental causes and the event therefore
may never happen at all. In this case the event is called accident.
c. The specified event must further be a character adverse to the interest of the insured.
The accident happening should result to a loss to the insured if calculated.

Conditions to be met for a contract of insurance to be established.

a. There must be a contractual relationship between the insurer and the insured.
b. There must be a premium - the consideration passed from the insured to the insurer.
c. There must be uncertainty in the time of occurrence of the risk. Certainties are not
insured.
d. The risk must not be an act carried out intentionally. Loss caused by intentional acts do
nit qualify for indemnity. ONLY losses that are accidental in nature and caused by
consequence of negligent act or omission.
e. Parties must not be in a position to control the insured event. The risk must be beyond
control.
f. There must be an insurable interest – exists when a person’s interest in an asset could
cause them to suffer a financial loss. Insurable Interest must exist at the time of
application abs at the time of the loss. Absence of insurable interest will render the
contract illegal, void or simply unenforceable. The insured must have a particular
relationship with the subject matter of the insurance.
Insurance offers covers for the following.

Risk – a chance or degree of a probability of loss to the subject matter of an insurance policy.
Peril - the cause of a risk of loss to a person or property.
Hazard – the probability of loss/injury especially a loss covered by an insurance policy. Also
conditions that increases chances of severity of a loss.
Accident – an event that takes place without one’s foresight or expectation. Qualifications of
an event to be considered a risk are: 1. the degree of foreseeability. 2. the state of mind of
the actor in intending or not intending the result.
Contingency –
Reinsurance- a risk transfer mechanism where an insurance company (cedent) takes a policy with
another insurance company (reinsurer) to protect/ guard themselves against risk of loss. The
cedent/reinsured is able to bring together/pool its insurance policies and then divide up the risks
among a number of reinsurers so that in the event that a large loss occurs, this will be divided up
throughout a number of firms, thereby saving the cedent from large losses.
Types of reinsurance contracts: treaty, facultative, excess…

NOTE: Risk must exist and continue to exist whether or not insurance is taken. For clarification
purposes, a risk only occurs in betting once one has paced odds/bet while in insurance, accident may
still occur whether insurance policy was taken or not.

CASE LAW – Definition.

Scottish Amicable Heritages Securities Association Ltd vs. Northern Assurance Co. (1983)
It is a contract belonging to a very ordinary class by which the insurer undertakes in consideration of
the payment of the estimated equivalent beforehand to make up to the assured any loss he may
have sustained by the occurrence of uncertain contingency. It is direct, not accessory obligation like
that of surety and is fulfilled and terminated by payment of the loss.
----the case law also applies in partial loss in indemnity, definition of insurance cost….

BASIC CHARACTERISTICS OF INSURANCE CONTRACT | ELEMENT | ESSENTIALS OF AN ASSURANCE

CONTRACT.
1. Control
For a contract of insurance to exist, there must be a binding agreement under which the insurer is
legally bound to compensate the other party or pay the sum assured. The parties to an insurance
contract are the insurer and the insured.
The event insured against must be beyond the control of the party assuming the risk. The issue of
control can well be illustrated by considering and contrasting a contract of insurance and
manufacturers contractual guarantee of his product to his customers.

See: Re. Sentinel Services PLC (1996) 1 W.L.R

A guarantee to repair double glazing and other home improvement products if the original supplier
went out of business was held to constitute a contract of insurance.

2. Premium
The consideration that passes between the parties to support the transaction. It is asserted that the
premium is the consideration which the insurers receive from the assured in exchange for the
undertaking to pay the sum insured if the event insured against occurs.
Any consideration sufficient to support a simple contract may constitute the premium in an
insurance contract. There can be no insurance business in absence of a clearly stipulated premium
and policy.

See: Hampton vs. Taxteth Co-operative Society (1915) 1 Ch 721

Also remember the elements of a valid contract; Consideration, Intention, Capacity and Offer.

Definition of insurance cost.

A contract for the payment of a sum of money for a corresponding benefit. Event must be uncertain.

CLASSIFICATION OF INSURANCE CONTRACTS.

1. Nature of events e.g. life insurance policy, indemnity policy
2. Nature of interest affected – life, property
3. Nature of contract of insurance
4. Nature of program of insurance
5. Direct insurance | re-insurance
Insurance is understood in the context of society. Insurance is a social device that depends on the
law of probability.

Why do we insure?
Transfer | shifting of risks from an individual to a group.
Sharing of loss on an equitable basis

Role of Insurance to the Economy

The insurance companies:
a. Provide revenue to the country as they pay taxes.
b. Provide employment.
c. Encourages investment.
d. Facilitate growth of markets.
e. Encourages savings.
f. Encourages growth/investment in risky enterprises.

TERMINOLOGIES
Loss – Being without sth that one previously possessed. Insurable loss must be uncertain,
unplanned, undesired. Loss may either be direct | indirect. On the other hand, peril is the cause of
the loss. Hazards are conditions that increases the severity of the loss.
Underinsurance refers to an agreement to indemnify against a property damage up to a certain
amount but for less than the property’s full value.

Insurable Interest.
Question: Insurable Inerest

2
LECTURES IN INSURANCE LAW
QUESTION: Insurable interest is an essential requirement of every contract of insurance. Evaluate
the extent to which insurable interest as a Common Law doctrine has been modified by the
Insurance Act of 1984 of Kenya as amended.
Insurable interest is a basic requirement of any contract of insurance unless it can be, and is lawfully
waived. At a general level this means that the party to the insurance contract who is the insured or
the policy holder must have a particular relationship with the subject matter of the insurance
contract, whether that be a life, property or a liability to which he might be exposed. (Lucena –vs -
Crawford).
The absence of the required relationship will render the contract illegal, void or simply
unenforceable depending on the type of insurance. (Lucena -vs- Crawford).

A contract of Life Insurance was enforceable at common law despite the absence of any relationship
between the insured and the life insured. The reason for this was that wagers in general were
legally enforceable and therefore the court had no option but to enforce wagers in the form of Life
Insurance Contracts. However, increase in the practice which could lead to murder led to the
enactment of the Life Insurance Act 1774. S.1 of the Act requires the insured to have insurable
interest in the life insured, S.2 requires the name of the persons interested to be named in the
policy and S.3 that the insured can recover no more than the amount of the value of his interest.

It is also important to note that there is a difference in the wording of Sections 1 & 2 of the 1774
Act. Failure to comply with Section 2 expressly renders the policy unlawful but Section 1 merely says
that policies without interest "shall be null and void to all intents and purposes whatsoever."
Despite this there is clear authority that breach of Section 1 renders the policy illegal (Harse -vs-
Pearl Life Ass Co. Ltd [1904] I KB 558. However, the only real practical difference concerns recovery
of premium paid on illegal policy if the insurer infact takes that point. The illegality is ignored where
the insurer has paid out under an illegal policy and there is dispute between rival claimants.

It has been authoritatively stated by the English courts that insurable interest is required at the time
of making the contract of insurance and not at the time of loss. (see Dalby -vs- India & London Life
Ass. Co. (1854) overruling the case of Godsall - vs- Boldero (1807). A proper discussion of the
statement would call for an examination of how common. law courts have interpreted the nature of
insurable interest with respect to family relationships, business relationships and also property
interests.

With regard to family relationships a minor (under the age of 18) has insurable interest in the life of
the parents as they are legally bound to support him or her. The interest is presumed to be
unlimited.
In Herse vs- Pearl Life Ass. Co. Ltd [1904] IKB 558 the Court of Appeal held the policy illegal for lack
of interest there being no legal obligation for the adult son to bury his mother when she died and
she’s not legally bound to keep house for him. A parent would not usually have the necessary
interest in the life of a child except for funeral expenses (Halford -vs-Kymer 830] 10 B & C. 724). An
adult child can have no insurable interest unless he can prove some legal obligation arising out of
the death of the parent (compare Barnet -vs- London, Edinburgh & Glasgow Life Association Co.
Ltd (1892) I QB 864 and Anctil -vs- Manufacturers Life Ins. [1879] Ac 704 (pc).

In the case of business relationships a creditor has insurable interest in the life of a debtor, a partner
has a insurable interest on the Life of another partner and employer has an insurable interest in the
life of the employee. The limit is the amount of interest in the insured (see Hebdon -vs- West 1803 3
B & S 579). Hebdon -vs- West seems to confirm that in substance and despite what has often been
said the effect of S.3 of the 1774 Act is to render this sort of insurance in law a contract of
indemnity, the major difference being that the measure of the insured's loss is judged at the time
the policy is effected rather than at the time of the loss.
A point which also merits consideration is the extent of application of the 1774 Act. Does it cover
property interest? There is no doubt that S.18 of the Gaming Act 1845 applies to all such insurances
so that any insurance on property with which the insured has no connection is void (see Macaura -
vs- Nothern Assurance Co. Ltd [1925]2 Al 619. It has been held that the 1774 Act does not apply to
insurance of goods and Marine policies for these are expressly excluded by Section 4. Whether the
Act applies to insurances of real property is a question of some difficulty which has not been settled
(see Re King [1963] Ch. 459 and compare with Mark Rowlands Ltd -vs- Barni Inns Ltd [1986] QB
211.

The common law position has been criticized as being out of touch with reality and therefore
general reform is necessary. Suggestions have been made to adopt the Australian position as stated
in the Australian Insurance Contracts Act 1984 (S.18 and 19) which provides that a requirement of
insurable interest is still desirable but sets out a list of relationships in respect of which it is
permissible for one person to insure another without prove of interest. Other proposals for reform
in United Kingdom are to abandon the requirement of insurable interest altogether and rely on the
general prohibition on wagering and on public policy or imposing a requirement of consent by the
life insured.

In Kenya the requirement of insurable interest is provided for under Section 94 of the Insurance Act
(Cap.487) Laws of Kenya. Section 94 takes the Australian approach by restating that insurable
interest is still necessary in all contracts of insurance by providing for a general prohibition on such
policies
Section 94 (2) then lists certain family and business relationships in which insurable interest is
presumed and therefore the insured will not be required to prove interest. The relationships include
that of husband and wife, dependant and benefactor for education, corporation on the life of
employee and a person who has pecuniary interest in the life of another. By taking the Australian
approach, the Kenyan Statute broadens the scope of insurable interest and captures the
relationships which had been held to contravene the common law requirement of insurable
interest. The Kenyan position is therefore more favorable to the insured and our law is much more
developed in this area than in U.K.
The effect of provisions of Section 94 of Cap 407 is also to supersede the provisions of the Life
Assurance Act 1774 with regard to the requirement of insurable interest. Our Act which came into
force at the same year as the Australian Insurance Contracts Act does not define what insurable
interest is and does not state when it is required. The Act is also silent on the measure of loss as
stated in Section 3 of the 1774 Act. In this regard our law seems to be at par with the Common law
position and our courts will have to follow closely the decisions of United Kingdom on this aspect of
the law.
NATURE | FORMATION OF INSURANCE CONTRACTS.
Its either to indemnify or pay a sum of money to a person against a loss. The concept of insurance is
encapsulated in the definition of the latin word Uberrimae fiei that loosely translates to “Of utmost
good faith.”

Origin of Uberrimae Fidei

The principles of uberrimae fidei were first expressed by Britain's Lord Mansfield in the case
of Carter v Boehm (1766)

Mansfield said:
"Insurance is a contract of speculation... the special facts, upon which the contingent chance is to be
computed, lie most 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 circumstances in his
knowledge, to mislead the underwriter into a belief that the circumstance does not exist... Good
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."

Notes: from the case of Carter vs Bohem.

Insurance is a contact of utmost good faith. Necessary disclosure is required from thr
parties.

Contract of insurance are contracts of indemnity. They can be classified as indemnity and non-
indemnity contracts.

Note: The insurer’s employees who indulge the insured into the contract is not regarded as the
company’s agent but the insured’s agent for the purpose of filling the proposal form. A cover note is
a temporary insurance cover. It is not always an indication that one is insured. An insurance broker
offers insurance terms but are not the underwriters. The brokers are on a higher plane compared to
the agents of insurance company. Whenever an insurance broker offers a cover note, it does not
culminate into an insurance policy. Another instance where a cover note does not amount to actual
cover is when one takes a health policy and the insurer warns that one will not be indemnified if risk
attaches within one month.

A stamped policy document is issued to give insight into the policy for the benefit of the insured. The
implication of issuing a stamped policy document is to evidence the contract in writing. Insurance
contracts are impliedly in writing as the stamp is issued by the…..

How does an insurance company signify acceptance?

The insured makes an offer to the insurer through by filling a proposal form. The insurer accepts the
offer by issuance of a policy to signify acceptance. The insurer could also send a letter of acceptance.
The offer must match the policy where in the instance that the policy is different from the policy, it
will be regarded as counter-offer. Issuance of a policy does not culminate into acceptance if the
offeror does not regard it as so. This also speaks to meeting of minds in terms of intention. As long as
the insured contests parts or whole of the policy, acceptance is not satisfied. It becomes more of
negotiating the policy. If risk attaches during the negotiation period, the insurer may fail to
indemnify the insured. Cover note is not acceptance, but having it does mean that you are covered
unless
If the policy diverts from the contents of the proposal, and introduces new terms, the same results
into counter-offer.
The acceptance and retention of premium leads to presumption that the insurer has accepted the
offer. This is a rebuttable presumption.
At times one can fill the proposal form and promise to pay the entire premium. The insurer asks for
the value of the subject-matter and the inured may pay a percentage of the premium upon which
they may over a cover note. The insurer then does an assessment of the true value of the subject
matter for the purpose of calculating premium.

The conduct of the insurer can also imply acceptance. (Acceptance through conduct- Borron case).
Even if premium has not been paid, nor policy issued, it does not naturally mean that there is no
acceptance. Thompson v adams, Jupiter general company case,

A contract of marine insurance is deemed to be complete upon issuance of policy.

At what point does the cover commence?

The commencement date is crucial in determining if and when the insured should be paid.
Indemnity contract runs for one year while non-indemnity contracts are determined by the parties.
For instance, the life insurance cover. The date and time of the cover is crucial in determining when
the party’s obligation arises.
Cover commences at the date prescribed by the policy. However, if the cover is silent or ambiguous
on the commencement date then the cover commences on the following full day beginning at
midnight. Catright v McComark 1963

Premium
It is the amount of money charged by the insurer as a consideration. It is the financial cost of getting
an insurance cover. Insurance Act CAP 487 in Section 2 defines premium. Premium is paid either as a
lump sum or in installments. For motor-vehicle policy, the owners are obligated to pay 3 months
installments in prior.
Failure to pay premium automatically revokes the insurance contract. Check sec 78. Premiums must
be stated in the Kenyan Currency. Exemptions are in the aviation insurance, marine insurance et al.

At what point does payment of premium become a conditioned precedent to validity of insurance
cover?

What is conditioned precedent and antecedent? Kenya National Insurance Company v Kimani and
another….Insurance Act sec 56. Marine Insurance Sec 52.
Premiums keep the insurance contract alive. Payment of premium is a conditioned precedent. This
must be explicit so that failure to pay premiums could lead to vitiation of the contract. Should the
parties conduct themselves in a manner that implies the premium payment is not a conditioned
precedent then the same may not be alleged and if risk attaches while the insured has defaulted, the
insurer is obligated to pay?

The concept of estoppel I insurance. It only suffice as a defense against the party insisting on their
legal right but cannot suffice as a claim.
The concept of waiver of premiums.

Is premium returnable?
There are situations where premiums are returnable, see Sec84 of the marine insurance act
(applicable to all other policies)
Where the consideration for the payment of the premium totally fails and there has not been
fraudulent activities on the side of the insured.
Partial return of the premiums is possible where there are different premiums and some have not
been exhausted.
3. When the policy is void or avoided by the insurer as from the commencement of the policy
provided there has not been fraudulent or illegality by the insured
4. Where the assured has no insurable interest
5. Where the insured has over insured the subject matter for example where the actual value is
more than the estimated value during
6. Where the assured has over insured by double insurance, the excess of the several policies
may be returned.

Instances when the premium cannot be returned.

Where the assured has a revocable interest which is terminated by the time of risk attaching.
Where the assured has over insured using several policies and the several policies has been effected
or where the risk attached and full payment has been made.