LAW OF INSURANCE

CLASS 12

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 The meaning of insurance
▪ This is a contract whereby a party known as the insurer undertakes, in
consideration for a sum of money known as premium paid by the insured,
to pay a sum of money or its equivalent on the happening of a specified
future event.
▪ The insurance contract is a contract like any other, but with particular
peculiar principles. The insurable interest should be beyond the control of
either party and there must be an element of negligence or that there is
uncertainty.
▪ Contracts dealing with uncertain future events are either alieatory,
contingent or speculative. In insurance risk exists in priori, whether or not
we insure. However in a wager/stake/ gamble there is no insurable
interest. It has been observed that the contract of insurance is basically
governed by rules which form part of the general law of contract. But
equally, there is no doubt that over the years, it has attracted many
principles of its own to such an extent that it is perfectly proper to speak of
the Law of Insurance. AUGUSTUS MBILA FOR MKU CERTIFIED SECRETARY
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 The problem with definition
▪ As a general rule statutes dealing with the regulation of insurance business do
not or have not defined the contract of insurance to obviate the danger of
excluding contracts within or that should be within their scope.
▪ However a definition is essential as insurance business is closely regulated. In
the words of Ivamy, General Principles of Insurance, “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 the other person called the assured, a sum of
money or its equivalent on the happening of a specified event”
▪ In the words of John Birds, in his book, Modern Insurance Law, “It is suggested
that a contract of insurance is any contract whereby one party assures the
risk of an uncertain event which is not within his control happening at a
future time, in which event the other party has an interest and under which
contract the first party is bound to pay money or provide its equivalent if the
uncertain event occurs.” AUGUSTUS MBILA FOR MKU CERTIFIED SECRETARY
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 Definition cont’d
▪ In the words of Channel J, in Prudential Insurance Co. v. Inland Revenue
Commissioner (1904) 2 K. B. 658 at p. 663. “A contract of insurance then must
be a contract for the payment of a sum of money or for some corresponding
benefit such as the rebuilding of a house or the repairing of a shape to become
due on the happening of an event, which event must have some amount of
uncertainty about it and must be of a character more or less adverse to the
interest of the person effecting the insurance” The Judge further observed that,
“ it must be a contract whereby for some consideration usually but necessarily
for periodical payments called premiums, you secure yourself some benefit
usually but not necessarily the payment of a sum of money upon the happening
of some event”
▪ Lord Clerk in Scottish Amicable Heritable Securities Association Ltd v
Northern Assurance Co (1883) 11 R 287 at 303. “It is a contract belonging to a
very ordinary class by which the insurer undertakes in consideration of the
payment of an estimated equivalent beforehand to make up to the assured any
loss he may sustain by the assurance
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 Essentials of an insurance contract
1. Agreement: For a contract of insurance to exist, there must be an agreement under which
the insurer is legally bound to compensate the other party or pay the sum assured
[premium]. This is the consideration that passes between the parties to support the
transaction. It is asserted that premium is the considerations which the insurers receive
from the insured in exchange for their undertaking to pay the sum assured in the occurrence
of the event insured against. Any consideration sufficient to support a simple contract may
constitute a premium in a contract of insurance.
2. Uncertainty: The insurance contract is aleatory, contingent or speculative as it deals with
uncertain future events. For an event to be Insurable it must be characterized by some
uncertainty. In the words of Channel J in Prudential Assurance Co. Ltd v. Inland Revenue
Commissioner “then the next thing that is necessary is that the event should be one which
involves some amount of uncertainty. There must be either some uncertainty whether the
event would ever happen or not, or if the event is one which must happen at some time or
another, there must be uncertainty as to the time at which it would happen”
3. Insurable Interest: The insurable event must be of an adverse nature .i.e. the insured must
have an Insurable interest in the property, life or liability which is the subject of the
insurance. Insurable interest is said to be the pecuniary or financial interest which is at
stake or in danger if the subject matter is not insured. It is a basic requirement for the
contract of insurance.
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 Essentials cont’d
4. Control: The insurable event must be beyond the control of the party assuring the risk
5. Accidental or Negligent Loss: Insurance can only be effected where loss is
accidental in nature or is a consequence of a negligent act or omission. Loss
occasioned by intentional acts does not qualify for indemnity or for payment of the sum
assured.
6. Risk: This is the central problem that insurance attempts to address. It is understood
to mean that in a given situation, there is uncertainty about the outcome and a
possibility exists that the outcome would be unfavorable. Risk has been defined as the
chance of loss, the probability of loss or the probability of any outcome different from
the one expected. It is a condition in which there is a possibility of an adverse deviation
from a desired outcome that is expected or hoped for. For individual proposes, risk is
measured by the probability of loss as the individual hopes that it would not occur. The
probability that it could occur is used to measure the risk. However, where a large
number of exposure units- policies- exist, it is possible to predict the probability of loss
which is the probability of an adverse deviation from the expected outcome. The
standard deviation is used as a measure of risk. The higher the probability of loss the
greater the risk as the greater the possibility of loss the greater the probability of a
deviation from what is hoped for. Risk differs from peril and hazards. A peril is the cause
of loss while a hazard is a condition that may create or increase the chance of a loss
arising from a given peril
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 Elements of Insurance
1. Parties: The parties to an insurance contract are the insurer ad the insured.
2. Premium: This is the consideration which passes from the insured to the
insurer to support the contract.
3. Risk: This is the probability or chance of loss, it is the probability of an
outcome adverse to what is expected or hoped for. Insurance is one of
managing risk. In an insurance contract, risk exists in priori while in a
wagering contract risk is created by the contracted. It was so held in
Robertson V. Hamilton
4. Uncertainty: For insurance to exist there must be uncertainly as to whether
the event will ever occur and if it must occur there must be uncertainty as
when it was so held in Prudential Assurance Company V. Inland Revenue
Commission
5. Insurable Interest: This is the monetary or pecuniary interest which a person
has in subject matter which he is likely to lose should the risk occur. The
interest may be legal or equitable
6. Control: The insurable event must be beyond the control of either party.
7. Negligence: Insurance is only sustainable where loss is likely to be
accidental or a consequence
AUGUSTUSof a FOR
MBILA negligent act or omission.
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 Parties to an insurance contract
• Insurer: This is the person who undertakes to pay the sum assured or
indemnity when the insured event occurs. To carry on insurance business
in Kenya, a person must be a body corporate (company) licensed by the
Commissioner of insurance to do business.
• Insured: This is the person who takes out insurance cover, he is the
person who pays the premium and may be a natural or artificial person.
The insured must have an insurable interest in the subject matter of
insurance.

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 The Contract of Insurance
▪ A contract of insurance comes into existence when an offer by the
proposer is accepted by the insurer. The proposer makes the offer by
completing and submitting to the insurer the proposal form. This form
seeks information in relation to: -
1. Particulars of the proposer
2. Particulars of the subject matter
3. Circumstances affecting the risk and
4. The history of attachment of the risk
▪ The proposer signs a declaration at the bottom of the form to the effect
that the answers given constitute the bases of the contract between him
and the insurer. The declaration is referred to as “Basis of Contract
Clause”. Submission of the proposal form to the insurer constitutes the
formal offer by the proposer. The insurer is not bound to accept the offer.
However, he may as he assesses the risk, extend temporal cover to the
proposer. AUGUSTUS MBILA FOR MKU CERTIFIED SECRETARY
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 The cover note
▪ This is the name given to the temporal cover extended to the proposer by
the insurer in the interim period between submissions of the proposal
form and its formal acceptance or rejection. It may be a detailed
document setting out the terms and conditions of indemnity or may be
simple letter from the company.
▪ The issue of a cover note may be justified on 2 grounds:
1. It is argued that insurance is formal and rigid hence time is of the
essence before cover is extended
2. It is necessary to extend immediate cover to the proposer since the
subject matter is exposed to risk.
▪ If risk attaches/arises during currency of the cover note, the proposer
recovers in accordance with the terms of the cover note, if formal, or on
the basis of the policy applied for: Cover notes generally last for 30 days.
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 Acceptance of the proposal form
▪ The insurer is not bound to accept the proposers offer, however,
if the accepted, it signifies a contractual relationship between
the two.
▪ The insurer may signify acceptance of the proposal form;
1. By formal communication
2. By conduct
3. Issue of the policy
4. Acceptance and retention of premium raises a presumption of
acceptance of the proposal form.

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 Commencement of insurance cover
• As a general rule, cover commences at the time and date
specified by the cover note or policy. However, if neither is
specific as to the time, cover commences at the beginning of the
next full day and a full day is a period of 24 consecutive hours
from midnight.

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 Termination of insurance contract
▪ An insurance contract may come to an end or terminate in any of the following
ways:-
1. Payment of Indemnity or the sum assured in the event of total loss. In the
case of partial loss, reinstatement does not terminate the policy.
2. Mutual agreement: The parties may at any time agree to terminate the
contract at the instance of the insured. In property insurance, the insured
becomes entitled to the surrender value of the policy. In life policies, if the
insured has been a bona fide insured for 3 years he is entitled to 75% of all
premium paid inclusive of any bonuses and interests payable.
3. Breach of condition or warranty: The insurer is entitled to apply for
cancellation of the policy if the proposer breached a condition or warranty to
procure the policy e.g. Misreprentation or non-disclosure of material facts.
4. Lapse of time: Indemnity contract or property Insurance lapse after one year.
It is the duty of the insured to renew cover.
5. Operation of law: These are circumstances which render the maintenance of
the policy impossible e.g Winding up or Liquidation of the insurer.
6. Sale of the subject matter
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 Classification of insurance contracts
▪ Insurance contracts may be classified on the basis of:-
1. The event insured: The category of insurance derives its name from the event
e.g. fire, burglary, marine, fidelity, motor etc.
2. The Interest Insured: The classification places contracts in 3 categories
namely: - a. Personal Insurance e.g. Life Insurance b. Property Insurance c.
Liability Insuring e.g. NSSF, NHIF, 3rd Party Motor Insurance
3. Nature of the Contract: - a. Indemnity b. Non-Indemnity Indemnity is a
contract whereby the insured takes out a policy on the understanding that
when loss occurs he will be compensated for the loss. This is property
insurance e.g. Fire, burglary, marine. Non-Indemnity contract is a contract
whereby a party known as the insured takes out a policy to secure the
payment of a sum of certain in money when risk attaches e.g. life insurance.
4. Whether Private or Social: private insurance is optional while voluntary, social
or compulsory insurance is a statutory requirement e.g. 3rd party Motor
Insurance.
5. Basis of the Programme: a. Insurance b. Reinsurance: This is a contract in
which an insurer insures himself with re-insurer against the risks he has
insured against. It may be voluntary or compulsory.
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 Principles of insurance
▪ The Principles includes:-
1. Insurable Interest
2. Utmost good faith (Non-disclosure)
3. Indemnity
4. Subrogation
5. Salvage
6. Re-instatement
7. Contribution and Apportionment
8. Proximate Cause
9. Abandonment
[Link] Clause
11.3rd Party Insurance
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 1. Insurable Interest
▪ This is the financial or monetary interest at stake or in danger if the subject
matter is not insured. It is the interest a person has in the subject matter which
he stands to lose in the event of its loss or destruction.
▪ 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 policy holder must have a particular relationship with the subject
matter with the insurance whether that be, “a life or property or a liability to
which he might be exposed”
▪ Every of insurance contract requires an insurable interest to support it,
otherwise it is invalid. This was held in Anctil Vs Manufacture Life Insurance
Co. [1899] AC 604
▪ Insurable interest is essentially the pecuniary or proprietary interest which is at
stake or in danger should the insured opt not to take out an insurance policy on
the subject matter. It is the interest which the insured stands to lose if the risk
attaches. AUGUSTUS MBILA FOR MKU CERTIFIED SECRETARY
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 Insurable interest cont’d
▪ The classical definition of insurable interest was given by Lawrence J in Lucena v Craufurd,
(1806) 2 Bos & Pul (NR) 269 “A man is interested in a thing to which an advantage may arise or
prejudice happen from the circumstances which may attend it… and whom it imported that its
condition as to safety or other quality should continue, interest does not necessarily imply a
right to the whole or a part of a thing, nor necessarily and exclusively that which may be
subject of privation, but the 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, detriment or prejudice to the person insuring, and where a
man is so circumstanced with respect to matters exposed to certain risks or damages, or to
have a moral certainty of advantage or benefit but those risks or dangers, he may be said to be
interested in the safety of the thing”.
▪ In Lucena v Craufurd, (1806) 2 Bos & Pul (NR) 269 it was observed that a person has an
insurable interest in a subject matter if he stands to gain by its continued existence and
stands to lose in the event of its destruction.
▪ To ascertain whether a person has insurable interest in subject matter, courts employ the
following rules: -
1. There must be a direct relationship between the insured and the subject matter.
2. The insured bears any loss or liability arising
3. The insured must have a legal or equitable interest /right in the subject matter
4. The insured’s interest/right must be capable of financial/pecuniary estimation or
qualification. Who AUGUSTUS MBILA FOR MKU CERTIFIED SECRETARY
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 Who has an insurable interest?
▪ Every person who has a legal or equivalent interest/right in a subject matter has
an insurable interest therein. Every person has an insurable interest in his life.
Under Section 94 (2) of the Insurance Act, the following people have insurable
interest in the lives of the other:
1. A wife in the life or the husband
2. A husband in the life of his wife. In Griffiths v. Fleming [1909] 1 K.B.805 it was
held that a husband has an insurable interest in the life of his wife and vice
versa.
3. A parent or a guardian of a child below 18 years in its life to the extent of the
funeral expenses
4. An employer in the life of the employee to the extent of the services rendered.
In Hebdon v. West [1863] 3 B & S 579 it was held that an employer has an
insurance interest in his employees to the extent of the services rendered and
an employee has an insurable interest in the life of an employer to the extent
of their relationship.
5. A creditor in the life of the debtor to the extent of the debt.
6. A dependant for maintenance or education in the life of the provider
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 Time of insurable interest
1. In Indemnity contracts e.g. fire, marine, burglary etc. it must
exist at the time of loss.
2. In life Insurance, it must exist when the contract is entered into.
▪ Insurable interest creates a direct relationship between the
insured ad the subject matter.
▪ It gives insured the necessary locus standi to enforce the
contract.
▪ However it has also been used by insurers to escape liability.

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 2. Non-disclosure/Utmost Good Faith
▪ The duty to disclose exists throughout the negotiation period. It generally comes to an end
when the proposal form is accepted. It was so held in Lishman v. Northern Maritime
Insurance Co (1875) LR 10 CP 179
▪ Effect of Non-Disclosure: The non-disclosure of a material fact by either party renders the
contract voidable at the option of the innocent party. In London Assurance Vs.
Mansel(1879)11 Ch D 363 when responding to a question in the proposal form, the proposer
stated that no other insurer had declined to take his risk; in fact 2 companies had previously
declined to insure him. Subsequently, the insurer sought to avoid the contract on the ground
of non-disclosure of a material fact. It was held that the contract was voidable at the option of
the insurer for the concealment of material fact.
▪ A similar holding was made in Horne v. Poland (1922) 629 Although the contract of insurance
is one of the utmost good faith certain matters need not be disclosed e.g.:
a) Provisions and propositions of law
b) Unknown facts as was the case in Joel v. Law Union and crown Insurance Company
c) Facts known by other party
d) Matters of public notoriety as AUGUSTUS
was the case in Bates [Link].
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 3. Indemnity
▪ This principle means that when loss occurs, it is the duty of the insurer to
restore the insured to the position he was before the loss. The insurer must so
far as money can do; put the insured to the position he was before the loss.
▪ Indemnity means that there should be no more or no less than restitutio in
integrum. Indemnity is a basic principle in property insurance; it has its
justifications in equity in that in its absence the insured is likely to benefit from
the contract. In the words of Brett L.J in Castellain v Preston (1883) 1 QBD 380,
“The insured is to be fully indemnified but is never to be more than fully
identified”.
▪ The principle of indemnity ensures that it is the duty of the insurer to ascertain
whether there are circumstances which reduce, diminish or extinguish the loss
as they have a similar effect on the amount payable by the insurer for the loss.
E.g. if the tortfeasor makes good the loss, the insurer is not liable to indemnify
the insured as was the case in Darrell v Tibbitts (1880) 5 Q.B. 560 at 568,
where a house was destroyed by fire through tenants negligence but the tenant
made good the loss.
▪ It was held that the insurer was not liable under the policy. The principle of
indemnity is given effect by the subordinate principles e.g: Subrogation,
Salvage, re-instatement, contribution and
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 4. Subrogation
▪ This means that after the insurer has indemnified the insured, he
steps into the shoes of the insured in relation to the subject
matter.
▪ It means that after indemnity the insurer becomes entitled to all
the legal and equitable rights respect the subject matter
previously exercisable by the insured.
▪ Subrogation facilitates indemnity by ensuring that the insured
does not benefit from the contract. It is an inherent and latent
characteristic of the contract of indemnity that becomes
operative after full indemnity.
▪ The insurer cannot under subrogate rights recover more than the
amount payable as indemnity as was the case in Yorkshire
Insurance Co. Ltd. v. Nisbet Shipping Co. Ltd. [1962] 2 Q. 330,
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 5. Salvage
▪ This is the recovery by the insurer of the remains of the subject
matter after indemnity. It is part of subrogation and facilities
indemnity. It is justified on the premise that the amount paid by
the insurer as indemnity includes the value of the remains

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 6. Reinstatement
▪ This is the repair or replacement of the subject matter in
circumstances in which it may be reinstated.
▪ Most indemnity policies confer upon the insurer an option to pay
full indemnity or reinstate the subject matter.
▪ The insurer must exercise his option within a reasonable time of
notification of loss and is bound by his option.
▪ If the insurer opts to re-instate, the subject matter must be re-
instated to the satisfaction of the insured.
▪ Any loss or liability arising in the course of re-instatement is
borne by the insurer.
▪ The economic effect of re-instatement is to benefit the insurer by
ensuring that he only pays full indemnity where the re-
instatement is not possible.
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 7. Double Insurance
▪This is a situation whereby a party takes out more than
one policy on the same subject matter and risk with
different insurers but where the total sum insured
exceeds the value of the subject matter.

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 8. Contribution and apportionment
• If an insured has taken out more that one policy on the same subject matter and risk with
different insurers and loss occurs, the twin principles of contribution and appointment apply:
-
a) If the insured claims from all the companies at the same time, they apportion the loss
between themselves on the basis of the sums insured. Each insurer bears part of the loss.
This is the “Principle of Apportionment”
b) If one of the insurers makes good the total liability to the insured, such insurer is entitled to
recover the excess payment from the other insurers. This is the “Principle of Contribution”.
This principle is to the effect that an insurer who has paid more that his lawful share of the
loss is entitled to receive the excess from the other insurer.
• The principle of contribution is equitable. An insurer is only entitled to contribution if the
following conditions exist;
1. There must have been more than one policy on the same subject matter and risk.
2. The policies must have been taken out by or on behalf of the same person
3. The policies must have been issued by different insurers
4. The policies must have all been in force when loss occurs
5. All the policies must have been legally binding agreements
6. None of the policies must have exempted itself from contribution.
• The twin principles of contribution and apportionment facilitate indemnity.
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 5. Abandonment
▪ This is the surrender by the insured of the remains of the subject
matter for full indemnity. It entails the giving up the res (residue)
to the insurer for indemnity.
▪ This principle has its widest application in Marine Insurance but
generally applies in case of: -
1. Partial Loss
2. Constructive total loss. The insured must notify the insurer of
his intention to abandon the subject matter.
▪ However, it is for the insurer to determine whether or not
abandonment is applicable. If the insurer opts to pay full
indemnity, it signifies the sufficiency of the insured’s notice and it
is an admission of liability. The insurer becomes entitled to the
remains of the subject matter.
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 10. Proximate Cause
▪ An insurer is only liable where loss is proximately caused by an
insured risk and not liable where the risk is excepted. The principle of
proximate cause protects the insurer from undue liability.
▪ Under this principle, the proximate and not the remote cause is to be
looked into. (Causa proxima non remota spectatur)
▪ The proximate cause of an event is the cause to which the event is
attributable. It is the cause which is more dominant direct, operative
and efficient in giving rise to the event. Courts have not developed
any technical test of ascertaining what the proximate cause of an
event is.
▪ They rely on common place tests of the reasonable man and that
among competing causes, one must be more dominant that the rest.
The proximate cause need not be the last on the chain but must be
the must operative in occasioning the loss.
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 11. Average Clause
• This is a clause in an insurance policy to the effect that if the
subject matter is under insured and partial loss occurs, the
insurer is only liable for a proportion of the loss and where loss
is minimal the insurer liability is extinguished.
• This clause ensures that subject matter is insured at its correct
value.

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 12. Third Party Insurance
▪ A person can insure himself against the risks of incurring liabilities to third
parties. Under the Insurance (Motor Vehicles Third Party Risks) Act, every driver
of a motor vehicle is required to be insured against liability in respect of death
or bodily harm to a person caused by the use of the vehicle on the road.
▪ Under the Act, it is an offence to use a motor vehicle on the road without having
in force an insurance policy in respect of injuries to third parties. The policy is
only considered valid when a certificate of insurance has been issued. This is
Insurance against risks to people other than those that are parties to the policy.
It is illegal to use, or allow anyone else to use, a motor vehicle on a road unless
there is a valid insurance policy covering death, physical injury, or damage
caused by the use of the vehicle.
▪ It also covers any liability resulting from the use of a vehicle (or a trailer) that is
compulsorily insurable. A judgement against the insured in respect of any
liability arising for causing death or bodily harm can be enforced against the
insurer.
▪ The insurance companies are not allowed to insert conditions that would
terminate third party insurance on the happening of a given event because if it is
allowed, the victims of road accidents will suffer tremendous hardships.
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