3) Insurance

i) Types of insurance
ii) Principles of insurance
INTRODUCTION
Risk and uncertainty are incidental to life. Human beings meet their untimely deaths they suffer from
accidents, destruction of property, fire, floods, earthquakes and other natural calamities. Life is therefore
uncertain, risky and insecure. Insurance comes into existence as a means to provide against risk and
insecurity. Insurance doesnt eliminate loss but it only spreads the loss over a large number of people,
who insure themselves against the particular risk. The main principle of insurance is the spread of risks to
a pool. It is a cooperative device to spread the loss caused by risk over a large number of persons who are
exposed to the same risk.
- Contract of insurance is one whereby a person called the insurer undertakes to make good the loss on the
happening of a specified event.
- The consideration for a contact of insurance is called premium i.e the price mutually agreed between
the assured and the underwriter for risk undertaken by the latter.
- The person who undertakes to indemnify the other against loss is called Insurer.
- The person who is given protection is called insured.
- The document in which contract of insurance is contained is called Policy. The policy itself is not the
contract but it is the evidence of the contact.
- The thing or property insured is known as subject matter of insurance.
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.
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, Modern Insurance Law, Pg 13,
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.
Distinction between Insurance and Wagering Contracts
A wager is a contract whereby two persons or groups with different views on the outcome of an uncertain
event agree that some consideration is to pass depending on the outcome. The contract is speculative and
contingent. However it differs from insurance in various ways.
1. Wagers are generally unenforceable whilst insurance contracts are enforceable.
2. The fundamental distinction between insurance and a wager is the risk in that whereas in insurance risk
exists a priori, in a wager there is a deliberate assumption of risk.

3. In wagering contracts neither of the contracting parties has the interest other than the sum to be won or
lost depending on the outcome. Payment is dependant upon the event as agreed to by the parties and is not
paid by way of indemnity or otherwise. In insurance, the insured has an interest of the subject matter in
respect of which he may suffer loss.
4. The uncertain event upon which the uncertain event depends is prima facie adverse to the insureds
interest and insurance is effected so as to meet the loss or detriment which may be suffered on the
happening of the event. In the words of Blackburn J in Wilson Vs. Jones [1867] L.R. 2 EX 139.
5. In wagers it is essential that either party may win or lose depending on the outcome of the uncertain
event. In insurance, the insured pays a premium to furnish consideration, it is not dependant upon the
event insured against and the insured cannot be called upon to contribute anything more, whether or not
the event occurs.
TYPES OF INSURANCE
The types of insurance which are generally available are:
Life assurance
This is a contract by which the insurer, in return for either a lump sum or periodical payments, undertakes
to pay the person for whose benefit the policy is effected, a sum of money:
- on the death of the person whose life is insured, or
- on a specified date, or on the death of the person whose life is insured, whichever happens first.
In the case of (a), the policy is called a Whole life policy. In the case of (b), the policy is called an
endowment policy.
Dalby v The India and London Assurance Co
It was explained that a life assurance policy is not a contract of indemnity. This is because a human being
has no market value.
Fire insurance
A fire insurance contract is intended to cover loss caused by fire during a specified period. The word
"fire" is usually defined in the policy. A fire insurance policy is a contract of indemnity.
Motor Vehicle Insurance
A motor vehicle insurance contract is one effected pursuant to the Motor Insurance (Motor Vehicle Third
Party Risks) Act to cover any liability which a motorist may incur as a result of causing the death or
injury of a third party (including other motorists).
The third party has a statutory right to sue the insurer direct, and is not affected by the privity of contract
rule.
Burglary insurance
A burglary insurance is a contract to indemnify the assured against loss arising from burglary. Such a
policy would be voidable at the option of the insurer if the property insured is deliberately overvalued.
Accident insurance
An accident insurance is a contract by which the insurer agrees to pay a specified sum of money upon the
happening of certain events, usually death of the insured in an accident. A smaller sum is usually payable
in the event of the insured's disablement (total or partial), either on a monthly or weekly basis. An
accident insurance is not a contract of indemnity.
FUNDAMENTAL PRINCIPLES OF INSURANCE
A contract of insurance must satisfy all the essential requirements of a valid contract as laid down in law
of contract. The insurance contract is contract like any other, but with particular peculiar principles. This
are summarised as follows:

1. INSURABLE INTEREST
In every contract of insurance, the insured must have insurable interest in the subject mater of insurance.
Insurable interest means the legal relations with property insured. It means the financial or monetary
interest. It refers to the financial loss or gain the insured has in the existence or non-existence of the
subject mater. Thus, a person is not entitled to insure another persons property or life, unless he has some
definite financial stake in the subject matter.
In life insurance, insurable interest must exist at the time of making the contract.
In fire insurance, it must exist both at time of making contract and time of loss of subject matter.
In marine insurance, it must be present at time of loss of the subject matter.
The case of Lucena v Craufurd (1806) gives meaning to insurable interest as follows:
A man is interested in a thing to whom advantage may arise or prejudice happen from the
circumstances which may attend it
Below are examples of situations which may give rise to insurable interest:
a. A creditor has an insurable interest in his debtor to the extent of his debt.
b. A partner has an interest in his partners during the subsistence of the partnership.
c. An employer has an interest in his employee while in his employment.
d. A surety has an interest in the trust estate.
e. A husband has an insurable interest in his wifes life and vice-versa.
f. A person has an insurable interest in his own life.
2. UBERRIMAE FIDEI
This phrase means utmost good faith. A contact of insurance is one based on utmost good faith, whereby
the insured is required to disclose all the relevant material facts to the insurer. This enables the insurer to
assess the risk and establishes the premium payable. Failure of utmost good faith will make the whole
contract void.
Material facts requiring disclosure are any facts, which influence a prudent insurer to decide whether to,
accept the risk and at what rate of premium if he elects to accepts the risk.
This concept was explained in Rozanes Vs. Bowen (1928) as follows:
It has been for centuries in England the law in connections with insurance of all sorts, marine fire,
life, guarantee and every kind of policy that, as the underwriter knows nothing and the man who
comes to him to ask to be insured knows everything, it is the duty of the assured- the man who
desires to have a policy, to make a full disclosure to the underwriter without being asked of all the
material circumstances, because the underwriter knows nothing and the assured knows everything.
This is expressed by saying that it is a contract of utmost good faith Uberrimae fidei
3. IDEMNITY
All the contract of insurance except life and personal accident insurance are contracts of indemnity i.e.
replacement of loss. This means that incase of loss, the insured will be paid the actual amount of loss not
exceeding the amount contained in policy. Indemnity is the controlling principle of insurance because
purpose of insurance is to replace the loss, as it is not a contract of making profit.
4. SUBROGATION
This principle is in support of the doctrine of indemnity. It also applies to fire and marine insurance only.
According to the doctrine of subrogation, after the insurer has replaced the loss he steps into the shoes of
the insured, and is required to recover any claims the insured may have against any 3rd party. This rule is
intended to prevent the insured from receiving double benefit through recovering from the 3rd party,
thereby making profit from the unfortunate event.

5. CONTRIBUTION
Where there are two or more insurers on the same risk and subject matter the doctrine of contribution
applies. The purpose of contribution is to distribute the loss on the insurers according to the liability on
subject matter.
In case of loss anyone insurer may pay the full amount of loss to the insured. After payment of his
amount, the insurer is entitled to claim contribution from the other core insurers. This is therefore an
equitable right which enables an insurer who has paid more than his share of liability to recover the excess
from the other insurers.
For the right or contribution to be exercisable, the following conditions are necessary:
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 taken out with different insurers.
4. All the policies must have been legally binding agreement.
5. All the policies must have been in force when loss occurs.
6. None of the policies must have exempted themselves form contribution.
6. CAUSA PROXIMA
It means proximate cause. According to this principle, the inured can recover the loss from insurer only if
the loss is caused by proximate cause. Proximate cause refers to the event insured against.
The principle of proximate cause is embodied in the maxim causa proxima non remota spectatur- which
means that the proximate cause of an event is the cause to which the event is attributable.
It is the more dominant, direct, operative and efficient cause of the event. It is the cause without which the
event would not have occurred. It is a cause which a reasonable person would attribute the event. It is an
important weapon in the hands of the insurers by which an insurer can escape liability by demonstrating
that the proximate cause was exempted.
Hamilton Fraiser Vs. Pandroff (1887)
A cargo of rice in a ship was destroyed by sea-water flowing through a hole dug by rats in a bathroom. In
the circumstances, the court held that insurer was liable to pay because the damage was due to a risk of
sea-water. In this case sea-water was the proximate cause while the rats were the remote cause.
7. MITIGATION OF LOSS
In case the event insured against occurs, the insured must take all the necessary steps to minimize or
reduce the loss. He must act as if the subject matter was not insured. If he does not do so, the insurer can
avoid payment of loss resulting from negligence from the part of insured.
8. ABANDONMENT
This is the unconditional surrender by the insured to the insurer of the remains of the subject matter for
full indemnity. It is the giving up by the insured of the remains for indemnity.
The insured must surrender the subject matter and the document of the title to the insurer. This principle is
generally applicable in constructive or total loss e.g. where it is too expensive to retrieve the subject
matter or where total loss is inevitable.
Abandonment depends on the insurer.s decision. The insured must notify the insurer on his intention to
abandon the subject matter. The notice must be given in accordance with the terms of the polity.

Acceptance of the notice by the insurer is conclusive evidence of sufficiency of the notice and admission
of the liability and the insured becomes entitled to full indemnity of the loss.
9. 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 fraction of the loss suffered. If the loss is minimal, the insurers
liability is extinguished.
10. DOUBLE INSURANCE
Double insurance takes place where the same risk and the same subject matter is insured with more than
one insurer. It is deferent from over-insurance which occurs where the total amount insured exceeds the
value of the subject matter insured.
It is important to note that a contract of insurance is one of indemnity (replacement of loss) hence double
or over insurance has no value or advantage to the insured. However, the question of double or over
insurance does not arise in the case of life and personal accident insurance because life is priceless.
11. RE-INSURACE
Reinsurance occurs if an insurer who has already insured specific property insures it with another insurer
usually a larger company. This is done in order to spread the risk over a number of insurers. Thus, if an
insurance company finds that it has entered into a contract which is a very expensive proposition, it can
relieve itself of part or the whole of liability by insuring the subject matter with some other insurers.
However, any claim arising under the policy would be paid and thereafter, it would recover the sum from
the reinsurance company to the extent of their liability under re-insurance contract. The person originally
insured has rights only against the insurer who has insured the policy and not against the company were it
is further insured i.e. re-insured. This is due to the privity of contract rule.
Re-insurance meets the following purposes:
- It guarantees the meeting of losses if the insurer is not in a position to do so.
- It facilitates the spreading of economic benefit from one company to another.
- It also ensures that part of the funds polled locally by insurance companies is invested locally.
12. ASSIGNMENT
A contract of fire insurance may be assigned only with the consent of insurers. If they refuse to give the
consent, no assignment can take place. This was explained in Saddles Company Vs. Badcock (1743) A life
policy may be assigned by endorsement on the policy or by a separate instrument. Written notice of the
assignment must be given.
13. INSURANCE AGENTS
Section 2[1] of the Insurance Act, defines an agent as a person who being a salaried employee of an
insurer who in consideration of a commission solicits or procurers insurance business for an insurer or
broker.
An insurance agent commits both parties to the transaction. At common law, an insurance agent is the
agent of the insured, if the proposer engages him to complete the proposal form. This is justified on the
doctrine of non-disclosure which assumes that the proposer is in control of the material facts affecting the
subject matter. Consequently any incorrect statements affect the proposer adversely.
However in cases of active fraud, the agent is deemed to be the agent for the insurance company.

Harse Vs Pearl Life Assurance Co. Ltd [1904] 1 KB 558

Held; Where the policy is illegal, the premium cannot be recovered if the insured is in pari delicto (i.e
parties are in equal fault) with the insurers. The plaintiff was induced to insure his mothers life by the
insurers agents innocent misrepresentation that the policy would be a valid one. The policy was illegal
under the Life Assurance Act 1774, Sec 1 since the plaintiff had no insurable interest. The plaintiff sought
to recover the premium which he had paid. It was held by the Court of Appeal, that the premium was not
recoverable because the parties were in pari delicto. Moreover it was found that there was neither misstatement of fact nor fraud on the part of the agent. That there was no greater impropriety on the part of
the agent than there was on the part of the plaintiff.
Under the provision of the Insurance Act 1881 of England, Insurance Agents are deemed to be agents of
the Insurer, and in the event of fraud, the insurer is liable. This principle was applied in:
O.Conner Vs B.D.B Kirby and Co and Another, [1971] 2 ALL ER 1415.
The proposer who owned a motor vehicle took out an insurance policy through the defendant insurance
broker. He supplied the necessary information and the broker completed the proposer form. In response to
one question, the proposer indicated that he had no garage and that the motor vehicle would be parked by
the side of the road. The broker indicated on the proposer form that the motor vehicle would be kept in a
garage. The proposer signed the proposer form without detecting the mistake and a policy was
subsequently issued. The insured lodged a claim and the mistake was discovered. The insurer repudiated
liability whereupon the insured sued the broker in damages for the loss suffered on the ground that the
broker had breached his contractual duty to complete the proposal form correctly.
Held: The broker was not liable in that, first, it is the duty of the proposer for insurance to make sure that
the information contained in the proposal form is accurate and should not or ought not to sign it if it is
inaccurate. As it was the insureds duty to confirm the contents of the form, the effective failure of the
loss is his failure to do so.
In Davis L.J. Said at 1421 It was the duty of the insured to read this form. It was his application, he
signed it and if he was so careless as not to read it properly, then in my opinion, he has himself to blame
However, under section 81[2] of the Insurance Act, where an agent or servant of an insurer writes or fills
in a proposal form for a policy of insurance with an insurer, a policy issued in pursuance of the proposal
shall not be avoided by reason only of an incorrect or untrue statement contained in the particulars so
written or filled in unless the incorrect or untrue statement was in fact made by the proposer to the agent
or servant for the purpose of the proposal and the burden of proving that the statement was so made shall
lie upon the insurer.