Key Principles of Insurance Contracts

Distinct/Specific Characteristics of insurance contracts

❖ Whereas all contracts share basic concepts and basic elements,

insurance contracts typically possess a number of distinct legal

characteristics that make them different from other legal contracts
❖ The common special characteristics of insurance contracts

include:
1. adhesion,
2. Unilateral,
3. Conditional,
4. Aleatory and
5. personal in nature - with exception of life insurance and some
maritime insurance policies
 1- Contract of adhesion

❖ In insurance, policies are contracts of adhesion drafted by insurers

and sold on a ‘take-it-or-leave-it’ basis.

❖ One party draws up its terms (provisions) and represents it to the

other party without negotiation, revising or deleting any provision.

❖ Insurance company writes the contract and the insured either

accept it or reject it.
 2- Unilateral contract

❖ A contract may either be bilateral or unilateral.

❖ In a bilateral contract parties exchange promises .
❖ In a unilateral contract, the promise of one party is exchange for
a specific act of the other party.
❖ Insurance contracts are unilateral, that is, insurance company
makes a legally enforceable promise to pay indemnity.
❖ The insured makes no promises that can be legally enforced and
the insured is duty bound to pay the premiums or to comply with
the policy provisions.
 3- conditional contract

❖ A condition is a provision of a contract that limits the rights

provided by the contract.
❖ Insurance contracts are conditional, that is, the insurance
company's obligation to pay a claim depends on whether the
insured or the beneficiary has complied with all policy conditions
e.g if a loss is suffered, certain conditions must be met before the
contract can be legally enforced and the insured or beneficiary
should satisfy these conditions and prove that he/she has an
insurable interest in the person insured or property insured.
 4- Aleatory contract
❖ This is an agreement that is concerned with an uncertain event that
provides for an unequal transfer of value between the parties
❖ So, if one party to a contract receives considerably more in value
than he/she gives up under the terms of the contract, it is called an
aleatory contract
❖ Performance of the obligation of both parties depends upon a
future event
❖ The uncertain event should be beyond the control of either party
 5-Personal contract

❖ Insurance contract is considered a personal contract because it

indemnifies the insured against loss of property

❖ However, life insurance and some maritime insurance policies are

notable exceptions. That is a life insurance policy can be freely
assigned to another person without the insurer's consent because
this may not change the risk or increase the probability of death.
 Principles of Insurance Contract
6. Principle of Utmost Good Faith
❖ In ordinary contracts, the parties have no duty to provide any
information to the other side, that is, each side must look out for its
own interests, and the principle of ‘‘let the buyer beware’’ (or
caveat emptor) applies.
❖ By contrast, parties in insurance contracts are required to disclose
all facts which are material to the policy arrangement
❖ This requirement is usually described as a ‘‘duty of utmost good
faith’’ (Latin expression, uberrimae fidei). Hence contracts of
insurance are commonly referred to as contracts uberrimae fidei;
contracts of utmost good faith in which full and honest disclosure
of material facts is obligatory.
 Principles of Insurance Contract
▪ The duty of disclosure in insurance is voluntary. It was first explained by Lord
Mansfield in Carter v Boehm (1766) Bun 1905.

• Lord Mansfield stated that the Insurer trusts

the insured not to keep anything in his knowledge because he has monopoly
of knowledge with respect to subject matter and that good faith forbids any
party to conceal what he knows to the other in the contract.
 Principles of Insurance Contract

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 exist and to induce him to estimate the risk as
it did not exist. The keeping back such a circumstance is fraud and
therefore the policy is voidable.
 Principles of Insurance Contract

▪ Words to the same effect were expressed by Jessel MR in London

Assurance Co Ltd v Mansel (1879) 11 Ch D 363
“The first question to be decided is, what is the principle on which the Court
acts in setting aside contracts of assurance? 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 or the other……..I take it good faith is
required in all cases…..”
 Principles of Insurance Contract

• In London Assurance Company –vs- Mansel (1879) -

when responding to a question in the proposal form, the
proposer stated that no other insurer had declined to take
his risk while in fact two companies had previously
declined to insure him.
 Principles of Insurance Contract
• Subsequently, the insurer sought to avoid the contract on the ground of
nondisclosure 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 –vs- Poland (1922).
 Principles of Insurance Contract
See also in Joel vs. Law Union and Crown Ins. Co (1907) 2 KB 863.
Fletcher Moulton observed : Joel vs. Law Union and Crown Ins. Co
(1907) 2 KB 863
In this case Fletcher Moulton observed “ In policies of insurance
whether marine insurance or life insurance, there is an understanding
that the contract is uberrima fides, that is, if you know…
 Principles of Insurance Contract

any circumstance at all that may influence the underwriter’s opinion

as to the risk he is incurring, and consequently as to whether he will
take it, or what premium he will charge, if he does take it , you will
state what you know. There is an obligation there to disclose what
you know, and the concealment of a material circumstance known to
you, whether you thought it material or not, avoids the policy.” The
test of what is material is that of a…
 Principles of Insurance Contract
…reasonable person and hence an objective test.
▪ Cases decided after Carter vs Boehm appeared to place a heavier
duty of disclosure on the insured. In the words of Cockburn CJ in
Bates vs Hewett (1867) LR 2QB 595:
“No proposition of insurance law can be better established than this: that the
party proposing the insurance is abound to communicate…
 Principles of Insurance Contract
to the insurer all matters which will enable him to determine the extent of
the risk against which he undertakes to guarantee the insured.” An exception
to the rule of disclosure is that where both parties have equal knowledge of
the facts, then neither party will be liable for non-disclosure.
 Principles of Insurance Contract
In Bates –vs- Hewitt [ibid] – the plaintiff took a policy on a war ship at a
time when both insurer and insured knew the ship to be a war ship. Plaintiff
(insured) did not disclose this to insurer expressly and when the ship was
destroyed at sea the insurer disclaimed liability basing it on doctrine of
non-disclosure.
Held: As both parties had known that the ship was a war ship the insured had
no duty to disclose.
 Principles of Insurance Contract
• Read the following cases: London General Omnibus vs Holloway
(1912) 2KB 72L; Banque Keyser Ullman SA vs. Skandia (UK) Ins Co
and others (1987) 2 AII ER 923;
MATERIALITY
▪ Courts have devised two tests of determining whether a fact is material or
not:
1. Reasonable Insured Test: In Horne vs. Poland (1922) 2 KB 364
 Principles of Insurance Contract

In Horne vs. Poland (1922) 2 KB 364:

it was stated that if a reasonable man would know that
the underwriter would be influenced in deciding the
premiums and whether to accept the risk, and the fact
that they were kept ignorant of it was fatal.
 Principles of Insurance Contract

The plaintiff was making a contract of insurance

and if he fails to disclose what a reasonable man
would, he must suffer the same consequences as
any person who makes a similar contract.
 Principles of Insurance Contract
2. Prudent Insurer Test
• Section 18 (2) of the Marine Insurance Act provides a circumstance is
material if it would influence the judgment of a prudent insurer in fixing
the premium or determining whether he will take the risk.
 Principles of Insurance Contract
Disclosure by assured. s18(1) Subject to this section, the assured 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.
 Principles of Insurance Contract
A circumstance is material if it would influence the judgment of a
prudent insurer in fixing the premium, or determining whether he will
take the risk.
(3) In the absence of inquiry, the following circumstances need not be
disclosed.
a) Any circumstance which diminishes the risk;
b) Any circumstance which is known or presumed to be known to the insurer; and the
insurer is presumed to know matters of common notoriety or …
 Principles of Insurance Contract
knowledge, and matters which an insurer in the ordinary course of his business, as such,
ought to know;
c) Any circumstance as to which information is waived by the insurer;
c) Any circumstance which is it superfluous to disclose by reason of any express or
implied warranty.
 Principles of Insurance Contract
Whether any particular circumstance, which is not disclosed, is
material or not, in each case, is a question of fact.
(5) In this section “circumstance” includes any communication made
to, or information received by, the insured.
 Principles of Insurance Contract

▪ In Associated Oil Carriers Ltd vs. Union Insurance Society Of

Canton Ltd. Lord Atkin said:
▪ The court of appeal held that a fact is material if a prudent insurer would
have treated it as increasing the risk even though he might have rejected
the risk or charged a higher premium.
 Principles of Insurance Contract
TIME DISCLOSURE:
▪ The duty to disclose exists throughout the negotiation period.
▪ Material facts coming to the knowledge of the parties thereafter need not be
disclosed, Lord Bramwell in Lishman vs Northern Maritime Insurance. Co (1875)
LR 179
Lishman vs Northern Maritime Insurance. Co (1875) LR 179
“The time up to which it must be disclosed is the time when the contract is
concluded. Any material facts that come to his knowledge or ought to have
come to his knowledge before the contract is finally sealed must be disclosed
to the insurer if the contract must still go on”
 Principles of Insurance Contract

The duty of disclosure continues throughout the negotiations until at least the
contract has been completed by acceptance see Whitewell vs Auto Car Fire
and Accident Ins. Co (1977) Lloyds Rep 41Whitewell vs Auto Car Fire and
Accident Ins. Co (1977) Lloyds Rep 41
In a proposal form for motor insurance…
 Principles of Insurance Contract
there was a question which asked the proposer whether any insurance
company declined his insurance, he gave the answer No. This was in fact a
true statement at the time at which he made it. But in fact, quite unknown
to him, two days before the proposal was accepted another insurance
company had declined to insure him.
 Principles of Insurance Contract
It was held there was no duty to disclose the fact afterwards because the
contract was concluded and the proposal was accepted.
• In rare circumstances the insurer may extend the duty of disclosure by
subjecting it to payment of premium. The effect of such a clause is that the
period during which has duty to disclose exists is enlarged so that any
material fact …
 Principles of Insurance Contract
…coming to the knowledge of the insured must be disclosed right up to the
moment that the first premium is paid. See Looker and Another vs Law
Union and Rock Insurance Co (1928) 1 KB 354.
In a proposal for life insurance the proposer in answer to a question. “Are
you now free from disease ailment? Said “Yes”. Five days later the
insurance company sent a …
 Principles of Insurance Contract
…conditional acceptance of the risk stating that “If the health of the life
proposal remains meanwhile unaffected, the policy will be issued on the
payment of the first premium. The risk of the Company will not commence
until receipt of the first premium”. Five days after the receipt of this letter he
become ill and died 4 days from pneumonia, but no notice of illness …
 Principles of Insurance Contract
▪ …was given to the company. He sent the company a cheque for the first
premium but was dishonored on presentation. It was held that the
insurance company was not bound to issue a policy. The insurer may also
insist that the duty to disclose will subsist up to the date of issue of the
policy. In such a case the duty of disclosure will last longer.
 Principles of Insurance Contract
•In Allis Chalmers –vs- Maryland Fidelity and Deposit Co. ltd [1960] 114 LT –
a fidelity policy was taken to commence from the date of its issuance. It had
been taken out to cover loss by embezzling by servant. Servant left before
the policy was delivered, having stolen from the plaintiff.
 Principles of Insurance Contract

•Plaintiff did not inform the insurer but paid

premiums. When he laid claim, his claim was
resisted. Held: it fails on account of non-disclosure
of employee having left the plaintiff.
 Principles of Insurance Contract

•The rationalization of doctrine of non-disclosure

appears to be that the insured has monopoly of
knowledge- the contemporary questions one would like
to ask himself are; would this stand today?
 Principles of Insurance Contract
•Should we hold an insured liable for things he did not have knowledge?
Why should the insurance company know them anyway? What reforms
should we suggest on the doctrine of non-disclosure? Caveat emptor -no
liability for innocent non-disclosure – should it be applicable?
 Principle of Utmost Good Faith…

How does it manifest?

❖ Under the Principle of Utmost Good Faith, each party is required
to communicate the terms and conditions in a non-ambiguous
manner to the other.
❖ This principle requires both parties to be transparent toward each
other.
❖ If the insured fails to disclose the material facts during the
formation of the contract, the insurance contract will be voidable at
the option of the insurer.
❖ The same goes for the insurer, as they are also obligated to be clear
on all terms and conditions of the insurance contract.
 Principle of Utmost Good Faith…

❖ The duty of utmost good faith is implemented through the legal

doctrines of representation, concealment, and warranty.

Utmost good faith

Representation Concealment Warranty

 Principle of Utmost Good Faith…
Representation
❖ It is a statement made by an applicant for the insurance to supply
information to the insurance company to induce it to accept a risk.
❖ Representations may be written application or oral.
❖ If an applicant misrepresents a material fact, the insurance contract
can be avoidable and the insured will have no coverage even
though he/she has an insurance policy.
❖ In the case of Pan Atlantic v Pine Top (1994) 3 All ER 581, the
House of Lords held that the insurer would be entitled to avoid the
contract if the misrepresentation or non-disclosure was material.
Sukinder Singh Jutley v Prudential Assurance & Another (2007)
eKLR (Kenyan position with regard to fraudulent claims was no
different from that in England).
 Principle of Utmost Good Faith…

Concealment

❖ This is the deliberate failure of an applicant for

insurance to disclose a material fact to the insurance
company .

❖ If an applicant intentionally concealed a material fact,

that he/she is obviously aware of its relevance to the
insurance contract, the insurance company will have the
right to void the contract
 Principle of Utmost Good Faith…

Warranty
❖ This is a policy provision or a promise made by the insured
making the insurer's responsibility conditional upon some fact or
circumstance concerning the risk.
❖ A warranty may be expressed or implied.
❖ Express warranties are expressly incorporated in the policy.
❖ Implied warranties are presumed to be present in the contract
document.
 EFFECT OF NON-DISCLOSURE

▪ The non-disclosure of a material fact by either parties renders the

contract voidable at the option of the innocent party. London
Assurance Co Ltd vs. Mansel, and Horne vs Poland.
▪ As enunciated in Carter vs Boehn the doctrine of disclosure
appeared fair to both parties in that certain facts may be peculiarly
be in the knowledge of one party.
▪ However subsequent developments placed a heavier burden on the
insured on the assumption that he has a monopoly of knowledge in
relation to the subject matter.
▪ During the mercantile era the doctrine was justified in the proposer
knew everything about the subject matter while the insurer knew
nothing.
 7. Principle of insurable interest
❖ This describes the relationship between the insured and subject
matter of insurance (exposure unit i.e. the person in life insurance,
the property in property insurance)
❖ The party to the insurance contract who is the insured or
policyholder has a particular relationship with the subject matter
of the insurance whether that be “a life or property or liability” to
which he might be exposed.
❖ A person or an insured is said to have an insurable interest in the
subject if any destruction of the subject adversely affects the
insured.
 Principle of insurable interest…

❖ The interest should be a right in property or a right arising out of

contract in relation to property
See definitions given by:
❖ Lawrence J in Lucena Vs. Crawford 1806 2 BOS PNR 269 at
302
❖ Feasey v. Sun Life Insurance of Canada [2003] Lloyd’s Rep. IR
637
❖ Lion of Kenya Insurance Company Limited v Edwin Kibuba
Kihonge [2018] eKLR
❖ Section 5 of the Marine Act, Cap. 390 Laws of Kenya
 Principle of insurable interest…
The rationale for insurable interest
❖ To prevent Gambling/Wagering Without an insurable interest, the
insurance contract would be a gambling contract, so it is the
characteristic of an insurable interest that distinguishes an
insurance contract from wagering contracts (the ‘anti-wagering
rationale’) .
❖ An insurable interest is thought to reduce the moral hazard posed
by the insured taking deliberate steps to destroy the insured subject
matter to benefit from a claim’s payment (the ‘moral hazard
rationale’) and
❖ The doctrine of insurable interest supports the indemnity principle
which rests upon the policy that claims payments should be limited
to an indemnity for the insured’s loss.
• It establishes a nexus between the insured and the subject matter in that the insured
starts to suffer prejudice in the event loss or destruction of the subject matter.
• It confers upon the insured the requisite locus standi to sue on the policy.
Cosford Union and Others vs. Poor Law and Local Government Officers
Mutual Guarantee Asso. Ltd (1910) 103 LR 463
• It is argued that insurable interest had been used by insurers as profit maximization
devise.
 Principle of insurable interest…

Existence of insurable interest

The time at which insurable interest must exist depends upon the type of
insurance. For example;
❖ In life insurance: The insurable interest must exist only at the inception of
the policy, but it does not have to prevail at the time of a loss.
❖ In property insurance: The insurable interest must exist at the time of the
loss. That is, insurable interest does not have to exist when the coverage is
put into effect.
 Principle of insurable interest…

Courts have applied the following rules as the determinants of

insurable interest
a) Existence of any direct relationship between the insured and the
subject matter.
b) The relationship must have arisen out of a legal or equitable right
or interest in the subject matter.
c) The interest bears any loss or liability arising in the event the loss
or risk attaches.
d) The insured’s right or interest in the subject matter must be
capable of pecuniary estimation or quantification.
Who has an insurable interest?
▪ See Insurance Co Ltd vs. Stimson (1888) 103 US 25 471:Where a
contractor insured a hotel after its completion but before handing it over to
the owner and the building was subsequently destroyed by fire before the
policy lapsed. It was held that the contractor had an insurable interest by
virtue of the mechanic’s lien.
▪ Contrast however with Stockdale vs Dunlop: where the plaintiff had
insured the value and profit of palm oil he had verbally agreed to buy from
a company while the ships were on the high seas but one went missing. A
claim for indemnity failed as the insured had no insurable interest in the
oil.
 A similar holding was made in Macaura vs Northern Assurance Co. Ltd
[1925] AC 69 (discussed earlier ) where the insured had taken out a policy
over the company’s timber.
▪ In Thomas vs Continental Creditors Ltd (1976) AC 346 :It was held inter
alia that a creditor had an insurable interest in the life of a debtor to the
extent of the debt.
 In Hebdon vs West [1863] 3 B and C 579 : It was held that an employer
has an insurable interest in the life of an employee to the extent of the
services rendered. In addition, an employee has an insurance interesting
the life of the employer to the extent of their relationship.
▪ In Griffith vs Flemming (1909) 1 KB 805:
It was held that a husband has an insurable interest in the life of his wife and
vice versa.
▪ See also in Sat Dev Sharma vs The Home Insurance Co of New York
(1966) EA 8 :
It was wrongly held that the proprietor of a driving school had no
insurable interest in the life of his instructors.
▪ In Harse vs Pearl Life Insurance Co (1904) 1 KB 558
Harse vs Pearl Life Insurance Co (1904) 1 KB 558 - an insurance agent
induced the plaintiff to insure his mother’s life stating his interest in that
life being “the potential funeral expenses”. The insurance company
rejected the proposal on
account of there being no insurable interest.
He then claimed a refund of the premiums paid. Held: the policy having
been void for want of insurable interest the plaintiff could not recover
those premiums unless he proved that the parties were not in pari delicto
and since the requirement of insurable interest is a requirement
of law, ignorance of the law will neither be a defence nor a sword in the
hands of the plaintiff.
Since they didn’t show he wasn’t in pari delicto with the insurance
company he could not recover.
In Worthington –vs- Churtis (1875) 1 ChD 419, - George Churtis took out
a life assurance policy valued at £500 in the life of his son George Churtis
Junior. The son
however died intestate while having some debts.
The issue was whether it was his estate which was entitled to the money or the
father who had taken out the policy.
The insurance company honourably paid the proceeds of the policy in court.
Held:-although there was no insurable interest by the father in the life of the son
measurable in monetary terms, the father was entitled as between him and the
estate of the son to receive the money since he was the one who took it out.
In Hughes –vs- Liverpool Victoria Legal Friendly Society (1916) 2KB - the
plaintiff took a policy of non-repayment of loans by his debtors after being
induced by insurance agents. The agents left the employment of the
defendant and a new agent advised the plaintiff that the insurance policies
were void for want of insurable interest for him as creditor for life*.
 He claimed refund of premiums and the company refused arguing that
the policy was void ab initio. The trial court rejected the claim. On appeal
the court held the appellant’s claim should succeed as he had been
induced to insure a life of which he had no insurable interest by an agent
who had deceived him and hence the appellant and the agent were not
necessarily in pari
delicto.
▪ Section 7 to 15 of the Marine Insurance Act, CAP 391 and Section 94
(2) of the Insurance Act set out circumstances in which persons have
insurance interest in the subject matter.
Insurable Interest is essential for all policies.
• 94. (1) Subject to this Act, no policy of insurance shall be issued on the
life or lives of any person or persons,…
• …or on any other event or events whatsoever, wherein the persons for
whose use, benefit or on whose account such policy or policies shall be
made, shall have no insurable interest.
• An Insurable interest shall be deemed to be had by:-
a) A parent of a child under eighteen years of age, or a person in loco parentis of such a
child, in the life of the child to the extent of funeral expenses which may be incurred
by him on the death of the child;
b) A husband, in the life of his wife;
c) A wife, in the life of her husband;
d)Any person, in the life of another upon whom he is wholly or in part dependent for
support or education;
e) A corporation or other person, in the life of an officer or employee thereof; and
f) A person who has a pecuniary interest in the duration of the life of another person, in
the life of that person.
• A child’s advancement policy effected either before, on, or after the
appointed date shall not be void by reason only that the person effecting
the policy had not at the time the policy was effected an insurable interest
in the life of the child.
▪ Read the following cases: Newbury International Ltd vs. Reliance
Naiornal (UK) (1994) 1 Lloyds Rep. 83: Fuji Finance Inc vs. Aetna life
Insurance (1997) Ch 173; Glengate vs. Norwich Union Ins. Society
(1996) 1 Lloyds 278; Colonial Mutual General Ins vs. ANZ (1995) 1
WLR 1140
 NATURE OF INSURABLE
INTEREST
▪ As a general rule the insured is not obliged to declare the nature or extent
of the insurable interest in the subject matter.
▪ Section 26 (2) of the Marine Insurance Act provides that the nature and
extent of the interest of the assured in the subject matter insured need not
be specified in the policy.
▪ This is because insurers are generally more concerned with the sums
payable or indemnity under the policy.
▪ However a description of the nature and extent of insurable interest is
necessary:
1. Where the proposal form contain a stipulation to that effect.
 2. Where the subject matter of the insurance includes prospective profits or
consequential loss
3. Where the subject matter involves precarious loss.

• The insured must have an insurable interest in the subject matter at one
point or another.
1. In indemnity contract, e.g. marine, burglary, etc insurance interest must exist when
risks attaches. Section 61 of the Marine Insurance Act embody this rule. See
Stockdale v Dunlop.
2. In life insurance the insured must furnish insurable interest when the contract is
entered into.
It was so held in Dalby vs India and London life Assurance Co. (1854) 15 CB 365

• In statutory policies the insured must have insurable interest at the time stipulated by
the statute. For example, in third party motor insurance the insured must have an
insurable interest when loss occurs.