Insurance law

University of Nairobi
Edited by Josiah M. Nyangweso LLB 3

Lectures by Gakeri
Introduction

The insurance contract is contract like any other, but with particular
peculiar principles. The insurance 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 a
priori, whether or not we insure. However in a wager 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.
In the words of Collinvaux in Law of Insurance Pg 2.

“Insurance contracts also exhibit certain features which

as a matter of common law apply only to them”

Problem of 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

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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.”

In the words of Channel J, in Prudential Assurance CO.

Ltd Vs Inland Revenue Commissioner [1904]2
KB 658 AT 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”

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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 Heritage

Securities Association Ltd Vs Northern
Assurance Co [1883] 11 ER 287

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 of an uncertain contingency.

Other cases:
1. Robertson Vs Hamilton [1811]14 East 522
2. Fuji Finance Vs Actria Insurance [1994] 4 All ER 1075
3. D.I.I. Vs St. Christopers Association [1974] 1 All ER 395
4. Medical Defence Union Vs Department of Trade [1979] 2 ALL ER
421
5. Gould Vs Curtis [1913] 2 KB 84
6. Hampton Vs Toxleth [1915] 1 Ch. 721
7. Re National Standard Life Assurance Corp. [1918] 1 Ch. 427.

Essentials of an Insurance Contract

1. AGREEMENT

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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
vent 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 or 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 Vs 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 b 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.
4. CONTROL

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The insurable event must be beyond the control of the party assuring

the risk. Re Sentinel Securities P.L.L [1996] I WLR 316

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. Toxleth Vs Hampton, Hall D. Ath Vs British

Prudential Assurance [1932]48 LT 240.

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 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- exists, 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.

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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.

CLASSIFICATION OF RISKS

 Financial and Non-financial

 Static and Dynamic
 Fundamental and particular.
 Pure and speculative.
 Personal and business.
 Objective and subjective

1. FINANCIAL AND NON-FINANCIAL RISKS - the term risk, in its

context, includes al those situations in which there is an exposure to
adversity. Risk is financial where the adversity involves the financial
loss and it is non-financial where no financial loss is involved.
2. STATIC AND DYNAMIC RISKS – Dynamic Risks result from
changes in the economy e.g. changes in price levels, consumer
tastes, income and output, and technology may cause a financial loss
to some members. These risks may occasion financial loss to the
population. However in the long term, they benefit society as they
are consequences of adjustments to misallocation of resources.
Dynamic risks occur without any precise degree of regularity and
are therefore less predictable.
Static risks are those which involve losses whether or not there are
changes in the economy e.g. dishonesty of other individuals, perils of
nature. They do not benefit society and are generally predictable

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 because they tend to appear over time with a reasonable degree of
regularity. They involve either a destruction of the asset or a change
in its possession and are thus not a source of gain to society.
3. FUNDAMENTAL AND PARTICULAR – Fundamental risks involve
losses impersonal in nature both in origin and consequence, that is it
is not caused by one individual and its impact generally falls on a
wide range of people. Examples of such risks include war, inflation,
changing customs, hurricanes, earthquakes and tidal waves. The
first three arise out of the kind of society we have and the last three
are attributable to some physical forces. A risk of an particular
nature has its origin in its individual events and its impact is felt
locally. Accidental damages to personal effects, theft of property and
explosion of a boiler are examples of particular risks.

4. PURE AND SPECULATIVE RISKS – a pure risk refers to that

situation that may result in one of two outcomes [a chance of loss]-
either there is a loss or there is no loss (breakeven). Pure risks can
be classified as personal, property, liability and risks arising from
the failure of others. Speculative risks describe circumstances in
which there is a possibility of loss or gain e.g. gambling and
wagers. No benefit can emanate from an exposure to pure risks.
Damage to one’s car by accident is an example of a pure risk.
Either there is damage (i.e. an accident occurs) or there is no
damage (the car is not involved in an accident).
Speculative risk refers to that situation that may result in one of
three possible outcomes – either there is a loss or there is no loss
or there is a gain. Those whom buy shares on the stock market face
speculative risks. One may buy shares at shs 20 each and a year
later they may be only worth shs. 15. On the other hand they may
no have changed in value and could still stand at shs 20.

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 Alternatively, they could have risen in value so that one could sell
them at shs 25 each and make a profit.
Speculative risks are common in the business world. Launching a
new product, fixing retail prices, exporting to a new market, etc
are all forms of speculative risks because they hold the possibility
of making a loss, breaking even, or making a profit. Similarly, pure
risks are common. The factory may burn down, profit may be lost
following a fire, and stock may be stolen. Should they not occur, it
wouldn’t mean that the firm has gained. It would only have broken
– even.

5. PERSONAL AND BUSINESS RISKS – To wrap it up, we can also

say that risks could either be personal or business in nature. The
former are those relating to an individual, for example, premature
death, dependent old age, sickness or disability and unemployment.
The latter are those relating to a business entity. They all have
financial implications that are undesired by the business firm.
Examples include the factory burning down, stock being stolen,
production being hampered by strikes, etc.

6. OBJECTIVE AND SUBJECTIVE- an example is loss of property by

theft. This risk is financial static, particular and pure in nature.
Furthermore, it could either be personal or business.

THE BURDEN OF RISKS.

The loss likely to arise in the evenyt of risk attaching is the primary
burden of risk and hence the need to caution oneself against such
possibility. This uncertainty has led to the evolution of various
methods of handling risk e.g.
 Risk Avoidance – This is the outright refusal by a person to
accept risk. It is accomplished by disengaging in the activity or

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 venture that give rise to a risk. However it is a negative
approach to risk management.
 Risk Retention – is the most common method of managing risk
where the person takes no positive step to address the
problem. It may be voluntary or involuntary that the person
does not know.

Transfer of Risk
This is effected by its transfer to another person willing to take the risk
or to bear it e.g. Hedging. Hedging is a method of risk transfer whereby
a trader buys and sells goods for future delivery cautioning himself
against a decline or increase in the market price. Insurance transfers
the risk from the insured to the insurer in return for a premium.

Risk Sharing
It may be accomplished in various ways e.g. formation of a company
where persons pool there investments together and each member bears
only a portion of a risk that the enterprise may fail. Insurance deals
with risk through sharing.

Risk Reduction
Is effected by the adoption of loss prevention mechanisms e.g.
Medicare, fire departments, burglar proof, alarms etc.

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 agre that some
consideration is to pass depending on the outcome. The contract is

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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. In the words of
Lord Ellenborough in Robertson vs. Hamilton [1811] at p 533
“Although insurance and wagering contracts are

both speculative contracts, risk is the essence to

the insurance contract and the assured and the
insured is made to effect the insurance contract
because of the risk of loss and does not create the
risk of loss by the contract itself”
3. In wagering contracts neither of the contracting parties has the
interest other than the sum to be won or loss 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 insured’s 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

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 be called upon to contribute anything more, whether or not the
event occurs.

1st November 2004

Parties to an insurance Contract.

Generally insurance combines first and third party contracts. Most
non-indemnity contracts are 1st party whereas third party contracts
are statutory. The insurer undertakes to compensate third parties
when risk attaches. However in all circumstances, parties to an
insurance contract are the insurer and the insured.

Insured- is the person who takes out the policy and may be
natural or juristic. A proposer for insurance must have an insurance
interest in the subject matter. Section 5 [1] of the Marine Insurance
Act, Cap 390 of the Laws of Kenya provides inter alia

“Every person has an insurable interest who is interest

in marine adventure”
Section 94 of the Insurance Act Cap 487 of the Laws of Kenya is
emphatic that,
“No policy of insurance shall be issued on the life or
lives of any person[s] or any other event or events
whatsoever wherein the person or persons for whose
use, benefit or on whose account such policy or policies
shall be made shall have no insurable interest.”

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All persons with an insurance interest may take out insurance policies.

The question of unsoundness of mind in insurance was considered in

Joel Vs Law Union and Crown Insurance Co [1908] 2 kb 863.

Insurer – Is the person who undertakes to indemnify the insured

or undertakes to pay the sum assured. Generally there are three classes
of insurance.
1. Insurance Companies
2. Underwriting Associations and Brokers.
3. Insurance Agents
The history of insurance practice lays more emphasis in the company as
a central undertaking in Insurance. The now repealed Insurance
Companies Act maintained that position.

Section 22 of the Insurance Act,

“ No person shall be registered as an insurer under the Act, unless that
person is a body corporate incorporated under the companies Act and
at least 1/3 of the controlling interest, whether in terms of shares paid
up capital or voting rights as the case may be as held by citizens of
Kenya”

Section 23 of the Insurance Act prescribes the minimum capital

requirements.
In 1987 it was Kshs 5,000,000/=, today it is Kshs 50, 000,00/=. The
minimum capital requirements for General insurance is Kshs
100,000,000/= while for general and others is Kshs 150,000,000/=.

Insurance Brokers

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Section 2 [1] Insurance Act, provides that a broker is an intermediary
concerned with the pacing of the insurance business with the insurer or
re-insurer for or in expectation of payment by way of brokerage,
commission, fee, allowance, return or otherwise for or on behalf of an
insurer, policy holder or proposer for the insurance or Re-insurance. A
broker is a person who promises to place insurance business with the
most competent insurer or re-insurer. Broking I insurance has a long
history traceable to the Lloyds of London Association.

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 fats affecting the subject matter. Consequently
any incorrect statements affect th4e proposer adversely.
However in cases of active fraud, the agent is deemed to be the agent
for the insurance company.

 Hughes Vs Liverpool Victoria Legal Friendly

Society[ 1916] 2 KB 482
 Harse Vs Pearl Life Assurance Co. Ltd [1904] 1
KB 558

Are premiums recoverable where there is no insurable interest?

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In the first case the premiums were recoverable. in the second case
both parties were not aware or did not know whether there was an
insurable interest in “ pari delicto’

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

558
Where the policy is illegal, the premium cannot be recovered if the
insured is in pari delicto with the insurers. The plaintiff was induced to
insure his mother’s life by the insurer’s agent’s innocent
misrepresentation that the policy would be a valid one. The policy was
illegal under the Life Assurance Act 1774, Sec 1since 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 no mis-statement of fact nor
fraud on the part of the agent. That there was non 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 top be agents of the Insurer, and in the event of
fraud, the insurer is liable.

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

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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 insured’s duty to confirm the contents of the
form, the effective failure of the loss is his failure to do so.

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 caress 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.

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Nature and Operation of Insurance
Mechanism.
Insurance may be described as a social device whereby a large group of
individuals or comp!nies through a system of equitable contribution
may reduce or eliminate certain measurable risks of economic cost
resulting from the accidental occurrence of disastrous events. Its effect
is to spread the cost which otherwise would fall upon an individual in
an equitable manner over the members of a large group exposed to the
same hazard. The theory behind Insurance is that members of an
insurance scheme contribute to a central fund from which payments
are made in case one of their members suffers loss by the occurrence of
the risk [event] insured against. The payment - individual contribution
to the pool is the premium.

Role of Insurance
Conventional insurance writers have observed that insurance has two
basic roles.
1. The transfer and shifting of risk from an individual to a
group.
2. The sharing of loss on an equitable basis by members of
the group.
These roles constitute the Insurance mechanism. Insurance attempts to
shift individual risk to a group and does so equitably should the risk
attach. Arguably therefore, insurance is an economic device whereby
the individual substitute a small certain cost for a large and uncertain
financial loss in the future which could exist or arise but for insurance.
In practice the Insurance mechanism anticipates the possibility of
organizing individuals into a homogenous group exposed to the same

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risk. Insurance companies employ two mechanisms to group individuals
into homogenous groups.

1. Law of large numbers, averages or probabilities

2. Posterior or empirical probabilities.

Law of Large Numbers.

Is based on the likelihood of an event taking place and makes
predictions on the likelihood of such event happening on the
assumption that the happening of the event can be predicted with
certainty. It operates on the premise that the observed frequency of nay
event approaches the underlying probability as the number of trials
approaches infinity. Hence the greater the number of exposure units
[risks], the greater he certainty.

Posterial or Empirical Probabilities.

Under posterior or empirical probabilities, acturial scientists determine
the probability of risk attaching by the reference to the past and
prevailing circumstances. It has been observed that insurance in its
fullest can only exist if the following elements are present :-
1) A person with an interest in something which can be valued
(valuable), monetary or otherwise.
2) The thing in which he has interest is subject to loss by a peril.
3) A substantial number of other persons have an interest in similar
things subject to loss by similar perils.
4) The chance of loss from the peril can be measured or measurable
with some degree of certainty or accuracy.
5) The desire by enough persons or members of the group to share
each others loss.

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 6) The loss or losses resulting from the insured risk must be definite
and predictable in financial or pecuniary terms.
7) The loss must be tortuous or accidental.
8) The loss must not be catastrophic in aggregate.
9) The cost of insurance must be economically feasible (managerial
premiums).

8th November 2004

Historical Development of Insurance

According to John Birds: the origins of modern insurance

contracts are to be found in the practices adapted by Italian
Merchants from the 14thC though the concept of insuring is an
ancient one. Maritime risks i.e. loss of ship and cargo at sea led to
the practice of medieval insurance dominated insurance for many
years. The practice of insurance spread to London in the 16 thC.
Originally there were no separate insurers. A group of merchants
would agree to bear their risks among themselves.

Insurance business in England developed alongside the Lloyds

exchange of London which was chartered in 1570. By it
incorporation the exchange was a meeting place for merchants
involved in commercial transactions with time, the merchants
realized that every transaction had a risk element and hence the
need to cushion themselves.

Marine Insurance

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This is the oldest form of insurance which was for many years
transacted at the Lloyds coffee house. The earliest forms of insurance
contracts were known as remissions or loons on Bottomy or Bills of
Obligations. A merchant could borrow money either by a public
subscription or privately for the purpose of purchase of goods or
shipment and the amount was payable at fixed rate of interest if the
cargo arrive safely and nothing was payable in the event of loss. This
system of insurance imposed a heavy burden on lenders and was
unsatisfactory for commercial purpose.
In marine insurance, the practice was that a merchant wishing to
insure would pass a slip of paper on which the particulars of the ship
and its cargo were written to people desirous of providing insurance
and those willing to accept a portion of the risk thereof, would initial
the slip when the entire amount of insurance was underwritten, the
contract was concluded.
For many years, common law played an insignificant role in the
resolution of the disputes relating to insurance. This however changed
with the appointment of Lord Manisfield as Chief Justice in the mid 18 th
century and by the latter half of the century the jurisdiction of courts of
an insurance matter had been established.
The principle developed in relation to marine insurance has by and
large been applied to other categories of insurance. Medieval insurance
was closely associated with banking. Attempts were made during the
13th century to separate the two traders in Venice Geneva where risk
was developed. Carrier or bill of lading or as a bond which developed
with insurance transaction exclusively. Its mode of operation was that a
merchants could say a specific sum of money in advance and the value
of the goods in question was payable in the event of lesser destruction.
In 1574, a chamber of insurance was established at the Royal Exchange
of London. This was a specialized section devoted to insurance
transactions and by 1575 insurance contracts had been standardized

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and subject to resign. These developments were necessary to
discourage fraudulent practices by insurers with insecure financial
base.
The chamber of insurance and the raging insurance policies registered
in Act of 1601. this statute created a special court to adjudicate
insurance matters because by statute and an insurance was
underwritten by individuals at the Lloyds of London. The South Sea
Bubble scan of 1720 revealed the dangers of an unregulated business
and this led to the enactment of the South Sea Bubble Act. It also led to
the incorporation of two insurance companies i.e. the Royal Exchange
Assurance Corporation or Marine insurance and the London Assurance
Corporation.

The London Fire Assurance Company was the 3rd company and was
incorporated in 1772 after the great London fire. Since then significant
attempts have been made to regulate the insurance industry by
legislation i.e. by the passage of the Marine Insurance Act of 1746 and
the Life Assurance Act 1774. These developments led to the codification
of Marine Insurance Act 1906.
[Some Text missing]

19TH November 2004

Nature and Scope of the Insurance

contract
Formalities – common law did not suggest that we should have an

insurance contract to be in any specific form. See Jupiter General

Insurance Co. Vs Kassanda.

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The contract of insurance must satisfy basic requirements of a contract
at common law, it must be characterized by an offer which is
unequivocally accepted and consideration must be furnished. The
parties must have intended there dealing to be a legally binding
agreement. A contract of insurance must be in writing by some note or
memorandum. However, this was not the requirement. At common law
parole contract of insurance was enforceable.

1. Jupiter General Insurance Co. Vs Kassanda.

2. Murfit Vs Royal Insurance Co. [1922] TLR 334
3. Ackman Vs Policy Holders Protection Board [1992] Lloyds
Reports 321.

Marine Insurance

However marine insurance must be written.

Section 22 of the Marine Insurance Act provides that a contract of
Marine insurance is inadmissible in evidence unless it is embodied in a
policy in accordance with this Act. Under Section 23 of the Marine
Insurance Act, the contract of marine insurance must specify the name
of the assured or the person who effect the policy on his behalf, the
subject matter of insurance and the risk insured against, the insurance
duration, the sum[s] insured and the names of the insurers.
Under Section 24 of the Marine Insurance Act, a contract for marine
insurance must be signed by or on behalf of the insured. Life, fire and
other types of insurance are not generally subject to any formalities.
However, under the provisions of the Stamp Duty Act, a stamp duty in
print must be fixed on the face of every policy without which the policy

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is inadmissible as evidence. Failure to fix the imprint renders the
insurer liable to a fine not exceeding Kshs 2000/=
In the contract of insurance the offer is made by the proposer by
completing and submitting the proposer form to the insurer. The offer
must be as complete as possible in materiality setting out the type of
contract and other necessary details. It must be communicated to the
insured. The proposal form is standard and so are the terms and are
subject to minimum negotiation. The insured [proposer] must have
insurable interest.
The bargain element cases include.
1. ReYager Vs Gurdian Association Co. [1912] 108 MT 38
2. Stir Fire and Burglary Insurance Co. Vs Davidson [1902] 5 AC 38
3. Interfoto Picture Library Vs Sulhoute Visual program [1989] QB
432
4. Rust Vs Abbey Life Assurance Co [1979] 2L.R. 334 (Lloyds)

PROPOSAL FORM
This is document furnished by the insurer for completion by the
proposer. It varies I form and content depending on the contract
applied for. It solicits specific information pertaining to the proposer
and subject matter. It generally seeks information relating to;
1. Name, postal address, occupation and residence of the proposer
as well as the location of the subject matter.
2. The risk or risks to be insured where the proposer does not seek
an all risk policy. The duration of the cover must be specified and
must be specific.
3. Circumstances affecting the risk. These are circumstances
peculiar to the subject matter as they determine the scope of the
risk to be undertaken.
4. The history of the subject matter; I.e. whether the risk has
previously attached, previous insurance, refusals if any, including

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 any cancellation. In addition the proper depose that the
information provided is true and forms the basis of the contract
between the parties. This is refereed to as the basis of the
contract clause.

This information enables the insurer to make a fair decision whether or

not to insure the risk and how much premium to charge
22nd November 2004

Signification of Acceptance of a Policy.

The submission to the insurer of a duly completed proposal form by the
proposer constitutes the formal offer to contract. In an indemnity
contract, insurers often extend temporal cover to the proposer between
submission of the proposal form and its formal acceptance or rejection.
This is the cover note. This is a technical term used by issuers to
describe the temporal insurance cover extended to the proposer during
the interim period between submission of the proposal from and its
formal acceptance or rejection.

1. The note may be justified on various grounds. Firstly before cover

is extended time and care must be taken to access and ascertain
the risk being undertaken.
2. It is argued that the insurance industry is rigid and formal and
hence the need for more time.
3. As explained in Julian Bright Vs H.G. Poland [1960] Lloyds
Rep. 420, the typical motorist is an impatient person and
demands cover before the traditional steps are complied with.
The cover note need note be a formal document. It is siufficient if

23
 the insurer intimates to the proposer that cover has been
extended from a particular date.

Murfit Vs Rayal Insurance Co. Ltd

[1922] 38 TLR 334

It was held that a letter from the head office of the company stating
that cover had been extended in a particular situation constituted a
cover note. The cover note operates as a contract of insurance between
the insurer and the proposer on the terms and conditions therein
embodied or necessarily implied from the nature of the policy applied
for. The proposer is entitled to indemnity in the event of attachment of
risk during the subsistence of the cover note if the document is
comprehensive. The proposer recovers on the basis of its terms and

conditions.

 Jadavji Shamji Panday Vs Oriental Fire and General

Insurance Co [ 1957] EA 21
 General Re-Insurance Case [ 1982] QB 1022
 Stockton Vs Mason [1978] Lloyds Rep. 430

The legal effect of the cover note lapses when the insurer issues a
policy or communicates his rejection of the proposal form. The effect of
the policy is backdated to the date of issue of the cover note. The cover
note is ordinarily effective for 30 days.

Section 75 of the Stamp Duty Act, provides that a policy should be

issued within 30 days of the receipt of the proposal form. However in

24
practice, the duration of cover note varies. If the insurer refuses to take
the risk, he must notify the proposer, failing which over note remains
effective and the insurer is liable should the risk attach as was the case
in

Cartwright Vs Mac Cormick Trafalgar Insurance

[1963]1 ALL ER 11.

The English Companies Act observed inter alia that an insurer must
actually signify his rejection of the proposal form expressly in order to
bring an end the binding nature of the cover note. Acceptance of the
proposal form is the prerogative of the insurer. However an insurer is
not obliged to accept any proposal from and in the vent of a refusal, he
is not bound to assign any reasons. However the insurer cannot while
accepting the proposal from vry or modify its terms without the
proposer’s concurrence.
1. Canning Vs Farquhar [1886] 16 QBD 727
2. General Accident Insurance Corp Vs Cronk [1901] 17
TLR 334.
Acceptance of the proposal form may be signified in various ways.

1. Formal Communication – this is an express intimation by the

insurer to the proposer that it has accepted the proposal form.
2. Issue of policy – as a general rule issue of a policy is conclusive
intimation of acceptance of the proposal form. The policy
becomes legally effective on the date of issue notwithstanding any
defects in the proposal form.

25
 McElroy Vs London Assurance Corp. [1894] 24 Lloyds
Rep. 287. Where the proposer had not signed the proposal form
but the insurer issued a policy, a subsequent attempt to csancel
the policy on the ground of the defect failed. It was held thet the
policy was binding as its issue was evidence that the company
had studied, considered and accepted the proposal form.
Pearl Life Assurance Co Ltd Vs Johnson [1909] 2 KB 88.
However issue of policy does not amount to an acceptance where
 The proposer does not treat it as such but continues
negotiating fro purposes of obtaining a modification of its
terms.
 The policy departs from the proposal form by introducing
fresh terms and thus amounts to a counter – offer.
3. Acceptance of premium – the acceptance and retention of
premium raises presumption in the absence of any circumstance
leading to a contrary conclusion that the insured had accepted
the proposal form. In such a case, the insurer is bound to issue a
policy and make good any loss arising.
In the words of Lord Mc Laven at Page 291 in McElroy Vs

London Assurance Corporation

“The company is not bound to deliver a policy without payment of
the premium. If they accept a premium before delivery of a policy,
I should be disposed to hold that the acceptance of the premium
and the delivery of the receipt thereof was sufficient to create the
obligation to issue a policy. Unless circumstances can be shown to
the contrary, the receipt of the premium offered and its retention
at once create a contract of insurance.”

 Re Economic Fire Office [1896] 12 TLR 142

26
  Harrington Vs Pearl Life Assurance Co. [1913] 30
TLR 24
4. Conduct of the Insurer – the fact that premium has not been
paid nor the policy issued does not necessarily mean that the
proposal from has not been accepted. Evidence may clearly show
that it has been accepted and that there is a binding agreement
between the parties. On the part of the proposer to pay the
premium and on the part of the insurer to issue the polic9 in
which case the insurer cannot refuse to accept the premium when
tendered or repudiate the contract.
1. Thompson Vs Adams [1889] 23 QBD 361
2. Adie and Sons Vs Insurance Corporation Ltd [1898]
14 TLR 544.
3. Re Yager [1912] LT 38
4. Jupiter General Insurance Company Vs Kassand
Cotton
5. White well Vs Auto Car Fire and Accident Insurance
Co. [1927] 27 Lloyds Rep. 41
Under Section 21 of the Marine Insurance Act, a contract of Marine
Insurance is deemed concluded when he proposal of the insured is
accepted by the insurer.

Acceptance of the proposal form marks the end of the proposer’s duty
to disclose material facts and the insurer cannot generally avoid the
contract for the non-disclosure of facts coming to the proposer’s
knowledge thereafter.

27
 Commencement of the Insurance
Cover.

Commencement of cover determines the time from which the insurer is

bound to indemnify the insured or pay the sum assured should the risk
attach. Indemnity contract ordinarily run fro one year while the
duration of non-indemnity contract is determined by the parties.

The date and time of commencement of cover is critical as it

determines the commencement of the parties’ obligations. As a general
rule, cover commences at the time and date prescribed by the policy or
cover note. However, if the document is silent as to the time or is
ambiguous, cover commences at the beginning of the next full day.
A full day is a period of twenty four consecutive hours from midnight. In

Cartwright Vs Mac Cormick Trafalqar

Insurance Co. Ltd

An insurance co. issued a cover note to a motorist showing the effective

time and date of commencement as 11.45 AM. On December 1959. the not
efurther stated.

‘ This cover note is only valid for 15 days from the commencement date
of risk…under no circumstances is the time and date of commencement
of risk to be prior to the actual time of issue of this cover note. …in nay
event the duration of the cover note shall not be more than 15 days
from the date of commencement stated herein”.

28
The motorist was involved in an accident at 5.45 pm on December 17,
1959, 15 dasy and 6 hours after the commencement of the cover.

It was held that the insurance company wads liable to indemnify the
insured. The court was of the view that on the true construction of the
cover note, the descriptions, date and time of commencement were
used as separate terms and the term ‘commencement date’ and date of
commencement were synonymous with the day of commencement and
consequently the 15 days read from the midnight of the commencement
date.

The decision in this case was also justified on common law. In the words
of Harman L.J. pg. 14 and 15;

“These cases seem to me to show that generally speaking when a day

mentioned, from which the time is to start running, fractions of a day
ought to be disregarded and time should run from midnight… and
therefore the 15 days is to be calculated from midnight on the
commencement date.”

In the words of Wilmer L.J

“There is abundant authority going back at least to Lord Mansfield’s

day for the proposition that in calculating a period of time, within which
some acts must be done or after which it may not be done, fractions of
the day are ignored.”
Cases on the day and date argument include;
 Hayman Vs Downs [1942] AC 356
 Stewart Vs Chapman [1951] 2 ALL ER 613, [1951] 2 KB 792
 Hercules Insurance Co. Ltd Vs Trivedi and Co. Ltd [1962] EA 348

29
  Cornfoot Vs Royal Exchange Association Corporation [1904] 1 kb
40

Termination of Insurance Contracts.

Termination of an insurance contract limits the obligations of the
parties thereto. Insurance contracts may come to an end or terminate
in the following ways:
1. Payment of the sum assured or total indemnity when risk attaches
– in property insurance, total indemnity discharges the contract
while in non-indemnity contracts, payment of the sum assured
when risk attaches or on maturity discharges the contract.
Reinstatement fro partial loss does not terminate the contract.
2. Agreement or mutual consent – parties by mutual consent may at
any time agree to cancel the policy thereby terminating the
contract. The parties’ mind must be at Idem.

Reyner Vs Hall
[1813] 4 Lloyds Rep. 12
In life insurance the insured is entitled to the surrender value of
the policy. Under section 89 of the Insurance Act, if an insured
surrenders a policy to the insurer, he is entitled to a partial
reimbursement of up to 2/3 of the total premiums paid inclusive
of interest and bonuses payable provided he has been a bona fide
insured fro at least 3 years.

In indemnity contracts, surrender of the policy before the end of

the year, entitles the insured to its surrender value.

3. Breach of warranty [conditions]- an insurer may apply to the

court for cancellation of an insurance policy for breach of a

30
 condition or warranty by the insured e.g. non-disclosure of

material facts or misrepresentation of facts. In Jubilee

Insurance Co Vs John Sematengo [1965] EA 233 The
plaintiff Insurance Co. filed an action against the defendant for a
declaration that the co. was entitled to avoid a motor insurance
policy on the ground that the same had been obtained by non-
disclosure of material facts and misrepresentation of facts.

The insured had inter alia failed to disclose the fact that the subject
matter of the insurance had been involved in an accident the day before
it was insured and that it had a major mechanical defect.

It was held that the insurance co. was entitled to avid the contract. In
the words of Sir Udo Udoma
“The plaintiff co. is entitled to the declaration sought because it has
satisfactorily discharged the onus which is upon it of establishing by a
preponderance of evidence that the insurance policy and the certificate
were obtained by the defendant by the non-disclosure of material facts
or by misrepresentation of facts which was false in some particular.”

1. The Motor Union Insurance Co. Ltd Vs. A.K. Ddamba [1963] EA
271

4. Operation of Law- an insurance contract terminates if

circumstances render its sustainability impossible e.g.
Liquidation or winding up of the insurer fro indemnity contract or
sale or transfer of the subject matter. In;
Kinyanjui Vs South India Insurance Co. Ltd
[1968] EA 160

31
The plaintiff had obtained judgment under the Fatal Accidents Act, Cap
32 Law s of Kenya, against the driver and alleged owner of the bus. The
insurance co disclaimed liability on the ground that though the alleged
owner had taken out a policy, the bus was being operated by a company
to which it had been transferred and hence the alleged owner had no
insurance 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 the bus. The transfer of the bus to the
company terminated the insurance cover hence there was no cover at
the time of the accident.

Peters Vs General Accident and Life Assurance Co. Ltd [1937] 4

ALL ER 628
5. Lapse [Effluxion of time] – indemnity contracts run for a year
and on expiry of their duration unless renewed by mutual
consent.

Classification of Insurance Contracts

Insurance contracts may be placed or classified into broad
categories.
1. By nature of event by which the sum becomes payable – this
classification places the insurance contracts into categories such
as Marine, Fire, Life etc. it places emphasis on the homogeneity
of the group.
2. Nature of the interest affected – this classification places
insurance contracts into three broad categories namely;
 Personal insurance e.g. life, accident, fidelity etc.
 Property insurance e.g. fire, marine, motor,
solvency. Crop, hypothecation etc.

32
  Liability insurance where policies are taken out in
compliance with statutory provisions e.g. the
compulsory third party motor insurance, workman’s
Compensation, NSSF, NHIF
3. Nature of contract of insurance – a contract of insurance may be
an indemnity or non-indemnity. An indemnity contract is a
contract of insurance where the insured pays a premium on the
understanding that in the event of loss, he will be indemnified for
the actual loss sustained. He must be restored to the position he
was before the loss.
Dalby Vs India and London Assurance Co.
[1854] 15 CB 361.

It was observed that policies of insurance under fire and

Marine risks are properly speaking indemnity contracts i.e.
the insurer engages to make good within limited amounts,
the losses sustained by the insured and nothing else.

A non-indemnity insurance contract is one in which the

insured secures the payment of a fixed sum of money,
previously determined as the value of the subject matter of
insurance. There is an assurance that the amount is payable
should risk attach e.g. of life policies.
4. By nature of the program of insurance – insurance programs
are either private or social. Private insurance is generally
optional and voluntary and is effected on the premise that the
insured stands to loose should risk attach.
Social insurance is compulsorily imposed upon the
assured by statute to protect the society from a hazard
which no single individual can cushion it. The individual
must guard against such risks as well as the activities
giving rise to the risk as it is beneficial to the society. Hence

33
 those involved must contribute to cushion those likely to be
affected e.g. compulsory third party Insurance.
Social insurance is said to be a device of pooling of risks
by their transfer to an organization under an obligation to
provide pecuniary benefits or service to or on behalf of the
insured on the occurrence of the event e.g.
 Compulsory third party motor insurance
 N.H.I.F.
 N.S.S.F
 Workman’s compensation.
5. Whether insurance is direct or re-insurance – Re-insurance
takes place when an insurer who has already undertaken to
indemnify the insured or pay the sum assured insures himself
against the same risk with a re-insurer. Reinsurance is a 2oth
century practice which evolved to cushion the insurers against
the insolvency. Re-insurance may be optional or voluntary.

Kenya Re- insurers are bound to insure up to 10 % with

PTA Reinsurance and up to 5% with the African Re-
insurance Corporation. However, an insurance co. is free to
re- insure up to 100%.
Role of Re-insurance
 Re-insurance assists in the distribution and transfer of
economic processes from one company to another
which benefits the economy.
 It also generates the making good of losses in the
event of insolvency.
 It also ensures that insurance companies invest part
of their accumulated funds locally.
Interpretation of Insurance Contracts.

34
In the words of Ivam in General Principles of Insurance Law;

“The construction of a policy of insurance is a question for the court,

when words in a policy have once been judicially interpreted, they
would be construed in the same way, should their meaning be in a
subsequent case, but when words have not been previously interpreted,
the court is guided by certain principles of general application, the size
of print, in insurance policies is immaterial.’

1. Application of the doctrine of precedent. – generally where

courts have already decided the meaning of words or phrases,
used in a policy of insurance, the doctrine of precedent applies in
subsequent similar cases and a similar construction is given. In
the words of Parke B in ;
a) Glen Vs Lewis [1853[8 Ex Ch 67
“If a construction has already been put on a phrase or clause in a
contract of insurance, the same should be given in subsequent
similar cases.”
b) Louden Vs British Merchants Insurance
Co Ltd
[1961] 1 Lloyds Rep 155
An assured under a motor insurance policy was killed in an
accident. There was no doubt that he was drunk at the time. The
insurance co. sought to avoid liability on the ground that he had
died on bodily injury sustained whilst under the influence of
drugs of intoxicating liquor, liability for which was excepted [not
covered] under the policy. It was held that since the words were
not uncertain as to their meaning and effect, they had to be
interpreted as they were in previous cases and the insurer was
not liable.

35
 c) Lawrence Vs Accidental Insurance Co Ltd
[1881] 7 QBD 216

However in the words of Atkin L.J. in

d) Re Calf and Sun Insurance Office
[1920] 2 KB 366 at 382
“On a question of construction, I protest against one case being
treated as an authority in another unless the language and
circumstances are substantially identical”

e) Dino Services Vs Prudential Assurance

Co. Ltd
[1989] 1 ALL ER 422

2. Intention of the Parties – it is a fundamental rule of construction

that the intentions of the parties prevail. Such intention is
discernible from the policy itself and other documents relied upon by
the parties. Courts are discouraged from speculating but reference
to surrounding circumstances may be made e.g. a previous
construction.
3. Policy must be interpreted as a whole [ wholistic Rule] – a
court of law must interpret an insurance policy in its entirety. All
words an phrases must be interpreted and none must be rendered
meaningless without good cause. As a general rule a policy should
be interpreted to give all clauses a positive meaning so as to give
effect to the intentions of the parties.
Hamlyn Vs Crown Accidental Insurance Co.
[1893] 1 QB 750

The insured had effected insurance against poultry injury caused by

violent, accidental, external and visible means. A clause exempted the

36
insurer from liabilities in respect of injuries arising from “natural
disease or weakness or exhaustion consequent upon disease.’

The insured had stooped to pick up a mango dropped by a child and

dislocated and injured cartridge of his knee. The insurer contended that
there was no external or visible means which caused the accident and
that it was not liable. It was held that the word ‘external’ was to be
contrasted with internal causes of injury such as disease, mentioned in
the clause, hence the injury was caused by external means and the
insured would recover.

In the words of Atkin L.J., ‘You must look at the document as a whole’

As a generals rule, similar words or phrases bear the same meaning

throughout the policy.

4. Ordinary Meaning – Words and phrases in a policy should be given

their ordinary or natural meaning while sentences should be
accorded their ordinary grammatical meaning. This rule is justified
on the premise that insurance practices and usages evolved.

a) Leo, Rapp Ltd Vs Mc Clure

[1955] 1 Lloyds Rep. 292
Stocks of metal were insured against theft whilst in warehouse
anywhere in UK. Some metal was loaded into a lorry parked in an open
space in a locked compound enclosed by a thick wall toped by barbed
wire and was stolen. It was held that the loss was not covered by the
policy as the compound did not constitute a warehouse. In the words of
Devlin L.J.

37
“When the court is construing words in an insurance policy, it must give
them their ordinary natural meaning.

b) Thompson Vs Equity Fire Insurance Co.

[1910] AC 592, 103 LT 153
The words must be construed in their ordinary meaning. A building
which was destroyed by fire had been insured under a policy which
exempted the insurance company from liability for loss while gasoline
was stored or kept in it. The fire was caused by a small quantity of
gasoline in a stove used for cooking purposes. No other gasoline was
used in the building. It was held by the judicial committee of the Privy
Council, that the insurance company was liable. The words “kept or
stored’ must be construed in their ordinary meaning. They implied a
considerable amount of gasoline or at least keeping it in stock fro
trading purposes.

Lord MaCnaghten at pg 154 said;

“What is the meaning of the words ‘stored or kept’ in collocation and

in the connection in which they are found they are common English
words with no precise or exact signification. They have a somewhat
kindred meaning and cover very much the same ground. The
expression as used in the statutory condition seems to point to the
presence of a quantity not inconsiderable or at any rate not trifling in
amount, and to import a notion of warehousing or depositing for safe
custody or keeping in stock fro trading purposes. It is difficult, if not
impossible, to give an accurate definition of the meaning, but if one
takes a concrete case, it is not very difficult to say whether a particular
thing is ‘stored or kept’ within the meaning of the condition. No one

38
probably would say that a person who had a r%asonable quantity of tea
in his house fro domestic use was ‘storing and keeping’ there, or [to
take the instance of benzene, which is one of the prescribed articles] no
one would say that a person who had a small bottle of benzene for
removing grease spots or cleansing purposes of that sort was ‘storing
or keeping’ benzene.
Some meaning must be given to the words ‘stored or kept’. Their
Lordships think those words must have their ordinary meaning. So
construing them their Lordships come to the conclusion that the small
quantity of gasoline which was in the stove for the purpose of
consumption was not being ‘stored or kept’ within the meaning of the
statutory condition at the time when the loss occurred.”
However technical meanings must not be resorted to unless necessary
to amplify the ordinary meaning of words or phrases. Nevertheless,
technical words or terms must be accorded their technical meaning
while technical legal terms must be given their strict technical
meanings.

London and Lancashire Fire Insurance Co Vs Bollands.

[1924] AC 836.
Technical legal words must be given their strict technical meaning.

A burglary policy relating to premises as a bakery excluded the liability

of the insurance company if loss or damage resulted from “a riot”. Four
armed men held up the employees with revolvers and seized money in a
cashier’s office. There was no other disturbance at all in the
neighborhood. It was held by the House of Lords that the Word ‘riot’
was used in its technical legal meaning and the action of the armed
men constituted “a riot.” Consequently the insured could not recover
under the policy.
Lord Sumner at 648 stated;

39
“It is true that the uninstructed layman probably does not think under
the word ‘ riot ‘, of even such a scene, as described in the cases stated.
How he could describe it I know not, but he probably thinks of
something, if not more picturesque, at any rate more noisy. But there is
no warrant here for saying that when the proviso uses a word which is
emphatically a term of art, it is to be confined, in the interpretation of
the policy, to circumstances which are only within the popular notions
on the subject and are not within the technical meaning of the word.
That clearly must be so with regard to martial law, that I think, must be
so with regard to acts of foreign enemies; and I see no reason at all why
the word ‘riot’ should not include its technical meaning as clearly as
burglary or house-breaking do.”

5. Ejusdem Generis Rule – where specifications of particular things

belonging to the same genus precede a word of general signification,
the latter word is confined in its meaning to things belonging to the
same genus and does not include things belonging to a different
genus. This rule is applied in circumstances in which a policy is not
exhaustive.

a) King and Travelers Insurance

Association Ltd
[1931] 48 TLR 53

Where specifications of particular things belonging to the same genus

precede words of general specification, the latter words are confined in
their meanings too things belonging to the same genus only. This is
known as the “ ejusdem generis rule”.

A policy of insurance against accidental loss of baggage contained a

clause stating “jewelry, watches, field glasses, cameras and other

40
fragile or specially valuable articles must be separately declared and
valued”. The insured claimed for the loss of a Persian lamb fur coat
which had not been separately declared and valued.. It was held by the
King Bench that the fur coat was not a fragile and a specially valuable
article requiring to be separately declared and valued and that the
ejusdem generis rule applied.

Rowlatt J stated that Furs are commonplace articles of dress in the

case of nearly every woman of any sort of comfortable means at all. The
circumstance that they afford a great scope for extravagance and
vanity, so that you can get furs of fantastic price, does not mind, show
that being commonplace articles of dress they are specially valuable in
the same sort of way that jewelry, watches, field glasses and cameras
are.”

b) Mair Vs Railway Passengers Association

Co Ltd
[1877] L.T.R. 356.
A Clause in life policy excluded the insurer from liability if the insured
met his death as a result of a wide variety of causes and different from
those provided by caariages or entering or leaving a carriage in motion
or riding races or stipple chases or generally by his willful exposing
himself to any unnecessary danger or peril.
The insured accosted a woman in the street and was knocked down by
the man in whose company she was and died as a result of injuries
inflicted upon him. It was held that the insurance company could not
rely on the exclusion clause as what happened could not be considered
to be ejusdem generis with the perils enumerated in the clause.

6. Contra Proferentem Rule – this rule is generally applied to

interpret standard form contracts if the words, phrases or sentences

41
 in a policy are vague or ambiguous, they should be interpreted,
contra-proferentes i.e. restrictively against the party relying on
them. It has been observed that’

“It is a well known principle of insurance law that if the

language of a warranty in a policy is ambiguous it must be

construed against the underwriter who has drawn the policy
and has inserted the warranty for his own protection”
Houghton Vs Trafalgar Insurance Co. Ltd
[1953] Lloyds Rep. 503, [1953] 2 ALL ER 1409, [1953] 3 WLR 985 or
[1954] 1 QB 247

A motor insurance cover not excluded “loss, damage and or liability

caused or arising whilst the car is conveying any load in excess of that
for which it was constructed”. The vehicle was carrying a driver and 5
passengers. The insurer contended that it was not liable in that the car
was conveying a load “in excess of that which it was constructed.” It
was held that the company was liable. In the words of Somervell LJ,

“If there is any ambiguity, it is the

company’s clause and the ambiguity
would be resolved in favor of the
assured”

a) English Vs Western
[1942] KB

42
Where a policy contains conflicting words; phrases or sentences, the
court must reconcile them so as to give the policy a positive legal
meaning. Where the conflicts re irreconcilable then written words if
any must prevail over printed ones. This is illustrated by;

b) Yorkshire Insurance Co. Vs Campbell

[1917] AC 218.
Express terms override implied terms with which it is inconsistent.
Where all terms are printed, the latter terms are given more effect than
the former as they may have been intended to qualify the former.
Where contractual terms are written, the general rule, parole evidence
is inadmissible to vary, change or explain such terms. However, such
evidence may be admissible to show the circumstances in which the
contract was entered into or demonstrate that the contract was subject
to a particular trade usage or custom.

c) Robertson Vs French
[1803] 4 East 130
Where there is conflict between the printed and written clauses of a
policy, greater consideration will be paid to the written clauses.

Lord Ellen borough CJ at pg 136 said’

“The only difference between policies of insurance, and other

instruments in this respect, is, that the greater part of the

printed instruments of them, being invariable and uniform,
has acquired from use and practice a known and definite
meaning, and that the words superadded in writing [subject
indeed always to be governed in point of construction by the
language and terms with which they are accompanied) are

43
entitled nevertheless, if there should be any reasonable
doubt upon the sense and meaning of the whole, to have a
greater effect attributed to them than to the printed words,
in as much as the written words are the immediate language
and terms selected by the parties themselves for the
expression of their meaning, and the printed words are a
general formula adapted equally to their case and that of all
other contracting parties upon similar occasions and
subjects.”
29th November 2004

PRINCIPLES OF INSURANCE
1. Insurable interest – in the words of John Birds,

“Insurance 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 loose if the risk attaches. The classical definition of
insurance interest was given by Lawrence J in

44
 Lucena Vs Craufourd
[1806] 2 Bos & PNR 269 at 302.

“ A man is interested in a thing to whom 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.

To be interested in the preservation of a thing is to be so circumstanced

with respect to it as to have benefit from its existence, prejudice from
its destruction. The property of a thing and the interest is devisable
from it may be very different of the first, the price generally the
measure but interest in having every benefit or advantage arising out of
or depending on such thing may be considered as being
comprehended”

This definition was partially adopted by the Marine Insurance Act 1906.
A person is deemed to have an insurance interest in the subject matter
if he is likely to suffer prejudice in the event of its loss, damage or
destruction. Courts of law have abstracted the following rules as the
determinants of insurance interest.
a) A direct relationship between the insured and the subject matter.

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 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 of loss
it risk attaches.
d) The insured’s right or interest in the subject matter must be
capable of pecuniary estimation or quantification.

As a general rule, insurable interest must have a pecuniary value.

Halford Vs Kymer
[1830] 10 B & C 724.
However it need not be permanent or continuous. A right to a future
interest or possession is insurable. The insured’s interest must be kept
must be real. It therefore follows that a mere expectation of acquiring
an interest is not insurable.

Stockdale Vs Dunlop
[1840] 6 M & W 224 OR 151 ER 391

Medieval Common Law did not insist on the presence of insurable

interest on the part of the insured. Its requirement as a component of
insurance contracts is for the most part statutory e.g. Under Section 4
[1] of the Marine Insurance Act, 1746, insurance interest was made a
perquisite of marine insurance. The requirement was extended to life
insurance by the Life Assurance Act 1774 whose Section provides that ‘

“No insurance shall be made by any person or persons on the life or

lives whatsoever wherein the person or persons for whose use, benefit

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or on whose account such policy or policies shall be made shall have no
insurable interest. [Similar to Section 94[1] Insurance Act.]

The requirement of insurance interest was extended to all categories of

insurance by the Gaming Act 1845. Section 5[1] of the Marine
Insurance Act and Section 94 [1] of the Insurance Act make insurance
interest mandatory in contracts of insurance.

Who has Insurance Interest?

Section 6-20 Marine Insurance Act.

Section 94 [2] of the Insuarcne Act.

1. Insurance co Ltd Vs Stimson. [1888] 103 US 25, 471. Where a

contractor insured the Hotel after the completion but before
handing over to the owner and building was subsequently
destroyed by fire before the policy lapsed. It was held that the
contractor was entitled to indemnity as he had an insurable
interest in the building by virtue of the mechanics lien.
2. In Stockdale Vs Dunlop. The plaintiff had insured the value
and the profit of palm oil, he had verbally agreed to buy from a
company while two ships were on the high seas and one went
missing. His action fro indemnity failed as he had not insurable
interest in the oil.

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3. In Macaura Vs Northern Assurance Co [1925]AC 619. The
plaintiff had insured the company’s timber in his own name and t
was held that he was not entitled to an indemnity as he had no
insurable interest in the timber. Appellant who owned a timber
estate assigned the whole of the timber to a company known as
Irish Canadian Sawmills Company Limited for a consideration of
£42,000. Payment was effected by the allotment to the Appellant
of 42,000 shares fully paid up in £1 shares in the company. No
other shares were ever issued. The company proceeded with the
cutting of the timber. In the course of these operations, the
Appellant lent the company some £19,000. Apart from this the
company’s debts were minimal.
The Appellant then insured the timber against fire by policies
effected in his own name. Then the timber was destroyed by fire.
The insurance company refused to pay any indemnity to the
appellant on the ground that he had no insurable interest in the
timber at the time of effecting the policy. The courts held that it
was clear that the Appellant had no insurable interest in the
timber and though he owned almost all the shares in the company
and the company owed him a good deal of money, nevertheless,
neither as creditor or shareholder could he insure the company’s
assets. So he lost the Company.

4. Thomas Vs Continental Creditors [1976] AC 346 it was held

inter alia that a creditor has an insurance interest in the life of the
debtor to the extend if the debt.

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5. In Hebdon Vs West [1863] 3 B& S 579. It was held that an
employee has an insurance interest in his employees to the extent of
the services rendered and an employee ahs an insurance interest in
the life of an employer to the extent of their relationship.

6. In Grifith Vs Fleming [1909] 1 KB 805. [1908-10] ALL ER 760,

it was held that a husband has an insurabnle interest imn the life of
his wife and vice versa.

7. In Sat Dev Sjarma Vs The home Insurance Co of New

York [1966] EA 8 It was wrongly eld that the plaintiff a proprietor of
a private school has no insurable interest in the life of the assured
who were one of the 3 instructors.

8. Harse vs Pearl Life Assurance Co. [1094] 1 KLR 558. An

agent honestly believed that the insured had an insurable interest
persuaded him to take a policy in circumstances in which he had no
interest but subsequently ascertained the truth and sought to
recover the premium. It was held that they were irrecoverable as he
had no interest and the parties were in Pari Delicto .” equally to
blame..

However in case of active frauds, premiums a[paid are recoverable

as were the case in Hughes Vs Liverpool Victoria Legal Friendly
Society [1916] 2 KB 482 where the defendant’ agent fraudulently
induced the plaintiff to take out an insurance policy in circumstances
in which he had no insurance interest.

The English Court of Appeal held the premiums recoverable as the

parties were not in pari delicto.

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In the words of Bankes L.J. at 496 he stated;

“The authority seem to mean to be all one way, namely that an

innocent plaintiff is entitled to say that he is not in pari delicto with
the defendant’s whose agent by force and fraudulent
misrepresentations induced him to belief that the transaction was an
innocent one..

Other case includes.

 Newbury International Ltd Vs Reliance National [UK] 1994] 1

Lloyds Rep. 83
 Fuji Finance Incorporation Vs Actir Insurance Co.[ 1997] 1 Ch
173
 Glengate Vs Norwich union insurance Society [1996] Lloyds
Rep. 278
 Colonial Mutual General Insurance Vs ANZ [1995] 1 WLR 1140

Section 7-15 of the Marine Insurance Act and Section 94 of

the Insurance Act identifies circumstances in which persons are
deemed to have an insurable interest in the subject matter.

Description of Insurable Interest.

It is generally no necessary for the insured to specify the nature and

extent of the interest on the subject matter.

Section 26[2] Marine insurance Act provides that the nature and
extent of the interest of the assured in the subject matter need not

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be specified in the policy. This position is justified on the premise
that the property insurance, the insurer’s principal concern is the
amount payable under the policy. However a description of the
nature and extent of the interest is necessary where:

1. The proposal form requires or contains an express stipulation or

condition to that effect.
2. The subject matter of insurance includes prospective profit or
consequential loss e.g. insurance of goods in transit.
3. Precarious losses are involved. These are circumstances in which
loss is likely to be greater than expected hence more information
is necessary to enable the insurer appreciate the full extent of the
risk.

When must insurable interest exist?

It depends on the contract. The insured must at one stage or another

exhibit an insurable interest in the subject matter. In indemnity
contracts e.g. fire, marine etc Insurable interest must exist when
risk attaches.

1. Section 6[1] Marin Insurance Act provides the assured must be

interest in the subject matter at the time of the loss. Though he
need not be interested when the insurance is effected

[Stockdale Vs Dunlop]

2. In life insurance the proposer must furnish an insurance interest

when the policy is effected. Dalty Vs India And London

Assurance Co

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3. With regard to statutory policies, the insured must furnish the
insurable interest at the time stipulated by the statute e.g. in
compulsory third party Motor Vehicle Insurance, the insured must
have an interest when risk attaches.

Role of Insurable Interest.

1. It establishes a nexus [link] between the insured and the subject

matter by demonstrating that the insured stands to loose should
the risk attach. This discourages the insured from destroying the
subject mater.

2. It confers upon the insured a right to sue on the policy. Cosforol

Union and Others Vs Poor Law and Local Government
Officers Mutual Guarantee Association Ltd [1901] 103 LT
463.

3. This principle has been used by insurers as a profit maximization

devise. Sat Dev Sharma Case, Pearl Life Insurance Case.

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