Lecture 2 Insurance Law

OverviewPrinciples of Insurance

Insurable interestIndemnityProximate causeUtmost good faith

Insurable Interest

Insurable InterestDefinition:Insurable Interest is a relation between the insured and the event insured against such that the occurrence of the event will cause substantial loss or injury of some kind to the assured.

Subject matter of insuranceFire – building, stock or machineryLiability – legal liability for injury or damageLife – life being assuredMarine – hull or cargo

Insurable Interest

The leading Roman-Dutch law case

Littlejohn v Norwich Union Fire Insurance Society 1905 TH 374

held that if the insured can show that he stands to lose something of an appreciable commercial value by the destruction of the thing insured then his interest will be an insurable one.

Insurable InterestEssentials

There must be some property, right, interest, life, limb or potential liability capable of being insured;This property, right, interest etc which must be the subject matter of insuranceInsured must stand in a relationship with subject matter of insurance whereby from its safety, well being or freedom from liability and would be prejudiced by its loss, damage or existence of liabilityRelationship between insured and subject matter of insurance must be recognised at law

Insurable Interest

Creation of Insurable InterestBy Common Law By ContractBy Statute

Insurable Interest -

creation

OwnershipLegal possessionCustody of property belonging to others e.g. baileesMarriage - spouses have an insurable interest in each other’s lifeA lien-holder has insurable interest in the property subject to lienA debt creates insurable interest between debtor and creditorAn employer has an insurable interest in the life of an employee

Insurable interest in life insurance

On your own lifeClose ties of blood or marriageWhen pecuniary interest is involvedmust be met only at the inception of the policy, not at the time of death

Insurable Interest in Property Insurance

Part or Joint VenturesMortgagees and MortgagorsExecutors and TrusteesBaileesAgentsHusband and Wife

Does a share-holder has insurance interest?

Insurable Interest in Liability Insurance

A person has insurable interest to the extent of any potential liability may be incurred by way of damages or other costs.It is not possible to pre-determine the extent of interest because there is no way of knowing

How often one may incur itWhat would be its monetary value

Insurable Interest of Insurer

Insurer may insure with another insurer part or all of the risk they have assumed – reinsurance

Insurable Interest

When must it exist?Marine insurance - at the time of lossLife insurance - at the inception of the policy; continuing insurable interest is not necessary

Other Insurances – at the time of lossand also at inception

Indemnity

Indemnity

Definition:A contract of indemnity is one in which the promiser promises to make good the loss that occurs to the promisee on the happening of an event.

Indemnity Contract – Fire or Marine Insurance

Non-indemnity Contract – Life Insurance

How is indemnity provided

Cash PaymentRepairReplacementReinstatement

Factors limiting Indemnity

Averageloss sustained X Sum insured/Market value

DeductiblesExcessFranchise

LimitsSum InsuredAOAAOY

First Loss policies

Extensions in Operation of Indemnity

ReinstatementContract Price InsuranceAgreed Additional CostsValued Policies

MarineFire

Indemnity -

corollaries

SubrogationLiterally means “to stand in place of”. It is the right of one person to stand at law in the place of another and to avail him of all rights and remedies of that other person.

ContributionIt was held in American Surety Co of New York v Wrightson 1910 that for contribution to apply the 2 policies involved must cover:

same interests; same assureds; same adventure; same risk;

different or same amounts.

Proximate Cause

Proximate Cause

Definition:The active efficient cause that sets in motion a train of events which bring about a result, without intervention of any force started and working actively from a new and independent source.

(Pawsey Vs Scottish Union & National Insurance Co. 1907)

Proximate in efficiency and not in timeEg: A ship torpedoed while her final loss was due to a storm.It is not the latest, but direct, dominant, operative and efficient cause that must be regarded as proximate.

Proximate Cause

In Etherington v Lancashire and Yorkshire Accidental Insurance Co (1909) a man fell from a horse and sustained injuries that prevented him from moving. As a result he contracted pneumonia due to lying in the wet and died. The proximate cause of his death was held to be the fall not pneumonia.

Utmost Good Faith

Utmost Good faith

Working Definition:A positive duty voluntarily to disclose, accurately and fully, all facts material to the risk being proposed, whether requested or not.

Caveat Emptor Vs Uberrima Fides

Utmost Good Faith

Material Fact:Every circumstance is material which would influence the judgment of a prudent insurer in fixing the premium or determining whether he will take the risk

Duty of disclosure

The requirement of utmost good faith is complimented by the duty of disclosure which places an obligation on both parties to the insurance contract to disclose material facts relevant to the contract to each other.

Contracts of AdhesionAmbiguities are interpreted in favor of policyholderApplied less often to commercial insurance

Doctrine of Reasonable ExpectationsCourts interpret contracts as would a reasonable person not trained in the law

Resolving Coverage Disputes

Resolving Coverage Disputes (Cont’d)

Bad Faith SuitsIf insurers refuse to pay claim cost or pay too little for claims, policyholders (or third-party claimants) to sue an insurer

Important Terms

Important Terms

Life Vs Non lifeInsurance Agent Vs BrokerCoinsurance Vs ReinsuranceSubrogation Vs AbandonmentGeneral Average Vs Particular AverageOccurrence Vs Claims Made

In lighter vein!!

NEW YORK, NY. (AP 1977) A man, knocked down by a car, got up uninjured, but lay back down when a helpful bystander told him to feign injury in order to collect insurance money. The car rolled forward and crushed him to death.

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