UNIVERSITY OF EMBU
SCHOOL OF LAW
LPR 313 INSURANCE LAW
GROUP 4 ASSIGNMENT
TOPIC: INSURANCE CONTRACTS
INSURANCE CONTRACT
An insurance contract is A contract whereby a person called an
insurer undertakes in return of the agreed consideration called
premium to pay another person called the assured a sum of money
equivalent to the happening of a specified event.
PARTIES OF AN INSURANCE CONTRACT.
Insurer-The one who undertakes the liability to pay
compensation upon the happening of the event specified by
the contract.
Insured/assured-the party covered under the policy upon the
payment of premiums.
The insured should have an insurable interest over the subject
matter under the policy
CHARACTERISTICS AND NATURE OF AN INSURABLE CONTRACT
Insurance contract follows the form of other contracts as stipulated under the law of
contract.
For the contract to be valid, it must fulfill the elements of a contract i.e. offer,
acceptance, consideration and the legal intention to form a legally binding c contract.
insurance contracts are guided by the general rules of contract law. Under insurance
contracts, capacity is not a special requirement. This was held in Darrel v international
insurance company where the plaintiff was drunk when he went to take an insurance
policy and the insurance companied agreed for the negotiations two years later the
plaintiff got injured and upon claiming under the policy, the company declined arguing
that due to reasons of dankness, the plaintiff had no capacity to contract on the date the
contract was entered. The court held that drunkenness could not incapacitate the
plaintiff to contract and it is only where the plaintiff had failed to disclose the material
facts that the contract would be invalidated not by the reason of drunkenness but non-
disclosure hence the plaintiff succeeded in his claim. An insurance contract however
entails the element of uncertainty/risk. For an insurance contract to exist, there must be
a risk which is insured against which upon the happening of that risk, the assured shall
be compensated.
CAREGORIES OF INSURANCE CONTRACT.
By nature of event by which the sum becomes Payable-This places the contract
into categories such as marine, fire, life and other contracts depending on the
happenings of the events
By nature of the interest affected-This includes personal insurance, property
insurance and liability insurance. The interest insured against differs in every
category.
By the nature of the contract of Insurance-Contract of insurance may be for
indemnity or non-indemnity. Indemnity contract is where the insured pays a
premium on the understanding that in the event of loss he will be indemnified for
the loss and be restored in the position he was before the loss while non-
indemnity contract is where the insured secured the payment of a fixed sum of
money previously determined as the value of the subject matter of insurance.
By nature of program insured-these are either private or social where private is
voluntary and is effected by the premise that the insured stands to lose should
risk attach. Social insurance provides pecuniary benefits on behalf of the insured
on the occurrence if the event.
DISTINCTION BETWEEN INSURANCE AND WAGERING CONTRACT.
A wagering contract is a contract by which two or more parties agree that a certain sum
of money shall be paid to one of them on the happening of an uncertain event or fact
which is in dispute between the two of them.
A Wagering is defined Hawkins J. by in the case of Carlil V Carbolic Smoke Ball
(1893)1 QB 256 as “a contract by which two persons professing to hold opposite views
touching the issue of a future uncertain event mutually agreed dependent upon
determining of the event that one shall win from the other a sum of money neither of the
contracting parties having any other interest”. An example of a wagering contract is
contracts involving betting sites like Betika, Sport pesa and also casinos whereby a
person x places a sum of money with a person y or company y and predicts an outcome
of a situation like football match and when the outcome is in his favor he gets the money
promised by person y or company y but if the outcome does not coincide with the
prediction he loses his money.
In both insurance contracts and wagers there is a consideration where one party
promises the other to pay a given sum of money to the other upon occurrence of a
certain event.
DIFFERENCES BETWEEN INSURANCE CONTRACTS AND WAGERS INCLUDE;
1.In insurance contract there is insurable interest between the insured and the risk while
in wagers there is no insurable interest between the parties and the risk. In Gambs v
Covenant Mutual Life Insurance Company limited 50 MO Para 44 it was held that
parties in a wagering agreement have no pecuniary interest in the insured.
2.Insurance contracts can be enforced while wagers cannot be enforced.
3.Insurance contract are contracts of indemnity while Wagers there is no requirement of
indemnity as tone of the party must win and the other loss in case of happening of the
event and when one of the party loses there is no indemnification.
4. In insurance contract the risk is uncertain while in in wagers the risk is certain that it
must happen leading to loss or profit by either parties since the assured introduces the
risk to himself by entering into the contract.
FORMATION OF INSURANCE CONTRACTS.
Insurance contracts should also fulfill the requirements and elements of contract
outlined in section 3(2) of law of contract act such as offer, acceptance and
consideration.
Procedure for taking an insurance policy
1.Filling a proposal form
It is how insured makes known to the insurer the nature of risk the insurer is to
undertake.
Contents of a proposal form include;
i)Description of proposed insured.eg.name, address and occupation.
ii)Description of risk to be insured.
iii)Description of matters affecting the risk insured eg.for a property insurance risk like
house the location of the house and general environment.
iv)Previous history of proposed insured
The proposal form should not be ambiqous or incomplete as it may lead to
misrepresentation on the part of either the insured or insurer and this may lead the
insurer to avoid the policy if the insured performs the misrepresentation. Section 80 0f
the insurance act states that the proposal form must not be incomplete or is likely to
mislead the proposer or policy holder.
In the case of Halima Abdi Noor Hassan &another V Co-operate Insurance Company
limited (2015)Eklr it was held that the insurance contracts puts on the insured principle
of good faith in filling of proposal forms.
2.calculation of the premium to be paid by the insurance eg.4.5% value of the property if
it’s a general insurance.
3.Payment of the first premium by the insured .
4.Issuing of cover note to serve as evidence that the Insured is covered. In some
insurance contracts the insured may be indemnified in case of happening of the risk
depending on the insurance policy as per the company.
5.Issuing of the policy outlining all the terms and conditions of the policy. In case of life
insurance, it is issued when the policy is approved and insurer offers the coverage while
in some insurance policies it is issued 30 days after issue of cover note.
PROCEDURE FOR CLAIMING COMPESATION.
1.Notification to the Insurer-Insurer has to be notified of the occurrence of the incident of
the risk.
2.Filling of a claim Form-Insured gives a detailed detail of the risk occurred.
3.Investigation of the claim-where insurer investigates the cause of accident and extent
of the loss occurred and give a detailed report to establish whether the insured is to be
compensated and if so by how much.
4.Payment of the claim-On receiving a report of investigation and ascertaining the loss
occurred the insurer indemnifies the insurer.
ELEMENTS / ESSENTIALS OF AN INSURANCE CONTRACT.
Insurable Interest-This is the interest that one has in the subject matter of an
insurance policy which is protected by an insurance contract. As defined in
Lucena V Cruford, the interest should have some relation to the subject of the
insurance which relates by the peril insured against. It is essential in that for one
to claim against losses in relation to insurance, he must-have interest to the
subject matter he is claiming against and the interest should be enforceable by
the law.
Risk-This is the potential loss resulting from a given action where one safeguards
himself via an insurable policy. Not all risks are covered under insurance since
some are catastrophic. An insurance risk must have the prospect of accidental
loss which must be as result of an unintended action and must be unexpected.
This is the basis of calculation of premiums that one has to pay.
The contract must be in writing in the form known as an insurance policy- For an
insurance policy to exist there must be an insurance policy constituting of all that
is expected to be done under the contract.
There should exist a contract between the two parties-An insurance contract
should consist of all the legal requirements for the formation of a legally binding
contract as required under the law of contract.
The contract should be that the insurer undertakes to indemnify the insured from
any loss on the happening of the event-Under this the insured is put in the
position he was before the happening of the event without gaining any profit from
the compensation.
DUTIES OF THE PARTIES IN AN INSURANCE CONTRACT
DUTIES OF INSURER.
He has a duty to disclose all material facts to the one taking the insurance before
entering the contract-This contract is based on the principle of utmost good faith
hence the disclosure of all material facts in relation to the event insured against
should be done.
A duty to defend the assured against claims by third Parties-Incise of the
happening of the indemnified event, which involves a third party, the insurer
should on behalf of the assured compensate the third party on behalf of the
assured.
Duty not to disclose any information revealed by the assured-the assured should
ensure that the information relating to the risk insured against remains
confidential between the two parties.
Duty to investigate and settle claims under the insurance policy-it is his duty to
carry out investigations as to what was the proximate course of the happening of
an event and whether it is in relation to the occurrence insured and later
compensate the assured of the loss he incurred.
DUTIES OF THE INSURED /ASSURED.
Duty to pay premiums under the insurance policy-The insured should pay the
agreed sum of money under the contract to cover the liabilities under the policy.
In the case of Joel V law union and crowd insurance, the insured was of unsound
mind. The issue arising was whether he was bound to pay the premiums. The
court held that under the law, even an insane person has an insurable interest
and is not excluded from the payment of premiums hence the the complainant
had to pay the premiums.
Duty to disclose all material facts without misrepresenting the facts- He is obliged
to describe the risk he wants to insure without leaving out any crucial information
in relation to the risk. As it was held in Pan Atlantic Insurance company V Pine
Top Insurance company limited, every fact and circumstance which can possibly
influence the mind of a prudent intelligent insurer in determining whether to
underwrite the policy or what premium he will underwrite is material hence it
should be disclosed.
Duty to take reasonable steps to prevent occurrence of loss-the insured should
avoid all the reasonable causes which can lead to loss and which he is in a
position to control.
Duty to disclose an increase of risk-The insured should inform the insurer on any
additional risk which was not included in the policy for him to be aware and for
the adjustments of the premiums to cater for the risks.
MISREPRESENTION UNDER INSURANCE CONTRACT.
This exists where parties fail to disclose all material facts as known to them or they
disclose the wrong facts. It is one of the ways of breaching the principle of utmost good
faith It exists in three types which are;
fraudulent misrepresentation-where the policyholder provides false information with the
intention to take advantage of the insurance policy
Innocent misrepresentation-where the insured gives the information the he believes to
be true at the time of contract signing but the information is false.
Material misrepresentation-where the policy holder fails to disclose sensitive information
that can impact the policy.
In case of a misrepresentation ,the insurer is bound to terminate the contract due to
breach of the contract where he can show that he entered into the contract due to the
misrepresentation and can also charge the insured with an insured fraud. Where the
insurer avoids the contract, he should return the premiums to the insured. As it was held
in Carter v Boem, parties are forbidden from concealing what they know to draw the
other into a bargain due to the ignorance of that fact and believing contrary hence the
insured having better means of knowledge of all material circumstances of the subject
matter he is bound to disclose those material facts to the insurer.
Where a statement as made to the best knowledge and belief of the insured, his only
obligation is to give an honest answer thus in such a scenario it will only be actionable if
it was fraudulently done. Hence the insured should avoid giving of incorrect statements
in the proposal form for avoidance of a misrepresentation.
WARRANTIES
As defined under the marine insurance act 1906, a warranty is that which the assured
undertakes that some particular thing shall or shall not be done or where he affirms or
negatives the existence of a particular state or fact. This was also observed in
Thomsons V Weems where it was held that in all policies of marine insurance, any
statement of fact bearing upon the risk introduced into the policy is construed as a
warranty.
For a statement to qualify as a warrant ,it must be expressly included in the contract and
show that the truth of that statement impacted both the insurer and the insured on their
rights.
There are two types of warranties in insurance ;Affirmative warranty which is a
statement regarding a fact that a contract was made and promissory warranty which is
a statement about future facts that will continue to be true throughout the policy. Where
a promissory warranty becomes true, the insurer may cancel coverage since the
warranty becomes untrue.
A breach of warranty discharges the insurer from all liability under the contract as from
the day of the breach. The insurer is not required to show that the breach is either
material or causative to any loss which arises. The insurer can repudiate his liability by
relying on the terms of the contract even where he decides to avoid the contract due to
a breach of warranties.
pre contractual statements may be incorporate to warranties through the ‘basic clauses’.
This clause incorporates into the policy certain representations made by the insured.
Any error arising from misrepresentation is a breach of warranty.
There exists a difference between a warranty and a representation such as a
representation need not to be inserted in the policy while a warranty should form part of
the written contract in the policy inclusive of other differences.
TERMINATION OF AN IBSURANCE CONTRACT.
This contract can be terminated through the following ways;
Agreement or mutual consent-The parties may at any time agree to terminate the
policy thus the parties mind should be idem.
breach of warrants-n insurer may apply to the court for the cancellation of an
insurance policy where a warrant is breached due to non- disclosure of material
facts or misrepresentation of facts. In Jubilee Insurance Company Limited V
John Semantego, the plaintiff filed an action against the defendant for a
declaration that the company was entitled to avoid a motor insurance policy on
the ground that the same had been obtained by non-disclosure of facts and the
insured had failed to disclose that the subject matter of the insurance was
involved in an accident the day before it was insured and it had been major
mechanical effect. It was held that the company was entitled to avoid the contract
on the ground of non-disclosure hence violation of the principle of utmost goof
faith.
Payment of the sum assured when risk attaches-This is where total indemnity
discharges the contract since the insured will be placed back in the position he
was before the happening of the event.
Operation of law- This is where the circumstances renders the contracts
sustainability impossible. This is seen in Kinyanjui V South India Insurance
Company LTD where the plaintiff had obtained judgement under the fatal
accidents act cap 32 against the driver. The insurance company disclaimed
liability of the ground that though the alleged owner had taken out a policy, the
bus was being operated by a company thus the alleged owner had no interest. It
was held that since the company owned and operated the bus, and had engaged
its own driver, the company alone had an insurable interest in rhea bus. The
transfer of the bus to the company terminated the insurance cover hence there
was no cover at the time of the accident.
Lapse of time –Indemnity contracts runs for an year and upon expiry of the
contract unless renewed by mutual consent the contract expires.
