MAKERERE UNIVERSITY

SCHOOL OF LAW

INSURANCE LAW

November 22, 2022

COURSEWORK

NAME: OKIRING STEPHEN

REGISTRATION NUMBER: 19/U/1772/PS

STUDENT NUMBER; 1900701772

 In the case of Mackenzie v Coulson (1869) L.R. 8 Eq. 368 at 375 court stated that there is
no class of documents as to which the strictest good faith is more rigidly required in courts of
law than policies of assurance. It is the duty of the assured, the person seeking a policy to
disclose to the underwriter who knows nothing to make a full disclosure to the underwriters
without being asked of all the material circumstances because the underwriter knows nothing
and the insured knows everything.

It is a general Common Law principle that, there is no duty of obligation on a party

entering into a contract to disclose any material information.1 Ordinarily, failure to disclose any
material fact which might influence the mind of a prudent contractor does not give right to a
party to avoid the contract, this is because the principle of ‘cavet emptor’ applies outside
contracts of sales2.

Nonetheless, some contracts are expressed by the law as one of utmost good faith, which
requires the disclosure of material facts. Insurance Contract as a special contract is considered
as a rare species of contract where both the proposer and the insurer are under a mutual duty
of utmost good faith. That law of insurance emphatically revolves around the duty of utmost
good faith. Etymological study points the origin of the term to the Latin expression ‘uberrimae
fidei’.3

Under the principle of utmost good faith, a party to an insurance contract is under the
duty to;

a. Avoid making misrepresentations

b. To disclose all material facts which are or ought to be known by him and which are material
to the formation of the contract.

1
Bell v Lever Bros Ltd (1932) AC 161 (HL)
2
Ibid Lord Atkin, 401
3
Birds’ ‘Modern Insurance law’, (9th edn 2013), 119
 In the case of Grafitec V. Phoenix Insurance Co Ltd4. court observed that, the doctrine of
uberrima fidei and the duty of full disclosure have consequences on a claim by the insured. The
law imposes an onerous duty of disclosure on proposers because they are supposed to have a
detailed knowledge of the risk which is not available to insurers. Accordingly, it is the duty of
the insured to disclose all material facts within his knowledge or contemplation.

A contract of insurance is expressed in Guardian Assurance Co, Ltd v Osei, as one of

utmost good faith (uberrimae fidei) where the insured must make full and true disclosure of all
material facts which would guide a prudent insurer in determining whether to assume or take
the risk and, if so at what premium and on what condition. In Guardian Assurance Co., Ltd. V.
Osei [1966] GLR 762 Edusei J., in determining whether or not a statement as to the ownership
of an insured vehicle was a material fact non-disclosure of which rendered the insurance
contract void ab initio, expressed in clear terms;

“a contract of insurance is one of utmost good faith (uberrima fides) which requires the proposer
to make full and true disclosure of material facts which would guide a prudent insurer in
determining whether to assume or take the risk and, if so at what premium and on what
conditions”. 5

In this case, the court whilst determining whether a statement as to the ownership of an
insured vehicle was a material fact, established that, Non-disclosure of material fact will render
a policy of insurance issued in consequences void ab initio.

The duty of utmost good faith is accorded a statutory codification under section 17 of
the Marine Insurance Act 1906.17 Insurance is uberrimæ fidei; ‘A contract of marine insurance
is a contract based upon the utmost good faith, and, if the utmost good faith be not observed by
either party, the contract may be avoided by the other party.

Utmost good faith essentially provides the standard of judgment to distinguishes some
classes of contracts (for insurance contracts which highly one of utmost good faith) from other

4
(2007) in the High court of Justice Accra, commercial Division,
5
Guardian Assurance Co., Ltd. V. Osei [1966] GLR 762
contracts of which no duty of disclosure of material facts is placed on those entering into the
contract at common law6.

Lord Atkin has made this observation in the case of Bell v Lever Bros Ltd, (1932) AC 161
(HL) where he stated, “*T+here are certain contracts expressed by law to be contracts of the
utmost good faith where material facts must be disclosed; if not the contract is voidable. Apart
from special fiduciary relationships, contracts for partnership and contracts for insurance are the
leading instances. In such cases, the duty does not arise out of contract: the duty of a person
proposing insurance arises before a contract is made…”

Lord Atkin’s statement is of immense importance and significant endorsement and this is
traceable to Lord Mansfield’s decision in Carta V Boehm (1776) 3 Bur 1905. The materiality of
the facts or information to be disclosed is expressed as, essentially every circumstance is
material which would influence the judgment of a prudent insurer in fixing the premium, or
determining whether he will take the risk.7

In Lindenau v Deborough is was observed that, the principle should apply in all cases of
insurance, whether on ships, houses, or lives, the underwriter should be informed of every
material circumstance within the knowledge of the assured8.

The development of this duty according to Channel J in Re Yager (1912) 108 L.T, 35-40, is
due to the unbalance in the bargaining power of the parties at the pre-contractual stage,
namely the insurer’s weaker position was one of the determining factors for the introduction of
good faith. This has received endorsement in the case of HIH Casualty and General Insurance
Co v Chase Manhattan Bank [2003]Lloyds Rep 61(HL), where Lord Hob house observed: “...the
practical circumstance which has since been said to justify this special treatment of insurance
contracts is a disparity between the knowledge of the proposer (and his agent) and the
underwriter”. The duty of good faith is mutual and either party is stern from concealing what he

6
John Lowry, Philip., ‘Rawlings Insurance Law: Cases and Materials’, (2004), 129
7
Sections 18(2), Marine Insurance Act, 1906
8
(1828) 8 Bam & C586
privately knows to draw the other into a bargain from his ignorance of that fact and his
believing the contrary.

Hence basing on the above, we can see that this doctrine of utmost good faith precedes
and transcends contractual construction and underlies critical adjudication in the law of
insurance but its relevance in comparison with indemnity is a question of great debate as
indemnity is of core value in an insurance contract as shown below.

Insurance exists not to prevent losses or to improve the financial situation of

policyholders but only to repay them for incurred losses covered by insurance. In other words,
insurance exists to “pay back” or “indemnify” policyholders for what they have lost. Losses are
usually measured in strictly monetary terms. As such, emotional loss beyond market value
attributed to a thing may not be recoverable by a policyholder, who can only collect funds to
the extent of tangible economic loss.

The Principle of Indemnification is one of the major defining characteristics of

insurance, providing that a loss payment will replace what is lost, putting the insured back to
where it was financially prior to the loss without rewarding or penalizing the insured for its loss.

Indemnity means security, protection and compensation given against damage, loss or
injury. According to the principle of indemnity, an insurance contract is signed only for getting
protection against unpredicted financial losses arising due to future uncertainties. The insurer
agrees to compensate the insured for the actual loss suffered. The object of indemnity is to put
the insured in the position they would have been in had the loss not occurred 9

The indemnity principle remains a rule of both persuasive and explanatory force. For
example, even pro-policyholder contract interpretation doctrines such as construing
ambiguities against the drafter. The concept of indemnity can be traced back to the case of
Bayner v Preston10, it was contended that the contract of insurance is merely a contract of

9
Malcolm Clarke, Policies and Perceptions of Insurance Law in the Twenty-First Century (Oxford University Press,
Oxford, 2011) at 265
10
2 Burr. 1198 (1761)
indemnity, and unless they recover in this action the defendants will receive double satisfaction
and undoubtedly it is settled law that a contract of insurance is a contract of indemnity.

According to McGilivary on Insurance Law11, An insurance contract is described as one in

which an insurer indemnifies another against losses from specific contingencies or perils. It
helps to protect the insured person or their family against financial loss. In the case of Castellain
V Preston (supra) one of the major principles arising from them are in every indemnity contract
of insurance intended to ensure that the assured recovers only his full indemnity.

In the above case, after the date of a contract for the sale of a house which was insured
against fire, and before completion of the purchase, the house was damaged by fire, and the
insurance company, in ignorance of the contract, paid the vendors for the damage
done. The purchase was subsequently completed, the vendors receiving the full amount of the
purchase-money, and also retaining the moneys paid to them by the insurance company. In an
action by the chairman of the insurance company against the vendors to recover the amount
paid by the company to them.

Held (reversing the judgment of CHITTY, J.), that the contract of insurance was a
contract of indemnity only, and therefore the receipt of the purchase-money by the defendants
must be taken into account in calculating the amount of the loss sustained by the defendant,
and as it had the effect of extinguishing such loss, the plaintiff was entitled to recover.

It was noted “Every contract of marine or fire insurance is a contract of indemnity, and of
indemnity only, the meaning of which is that the assured in case of a loss is to receive a full
indemnity, but is never to receive more. Every rule of insurance law is adopted in order to carry
out this fundamental rule, and if ever any proposition is brought forward the effect of which is
opposed to this fundamental rule, it will be found to be wrong.”

11 th
McGilivary on Insurance Law, 10 Edition
 The primary obligation of an insurer under an indemnity insurance contract is to hold the
insured harmless against loss by an insured peril. This has four doctrinal consequences: first, a
failure by the insurer to hold the insured harmless constitutes a breach of contract. Secondly,
the insured will have a cause of action for breach of contract, which arises if a loss caused by an
insured peril is sustained. Thirdly, the insured’s claim is a claim for damages,12 and not a claim in
debt.

The insurer is responsible for compensating the insured, to put him in the position he or
she would have been in (financially) had the contract been performed.13 Fourthly, at common
law, if the insurer refused or failed to pay a valid claim, the insurer was not liable to the insured
for any damages over and above the amount of the indemnity, since no such remedy was
available for late payment of damages

The statutory definition of insurance, if applied literally, would encompass an array of

contracts which are not ordinarily considered to be insurance according to the commonly
understood meaning of the term. To characterize as insurance every contract that contains an
indemnity agreement of some sort would bring a multitude of everyday commercial contracts
under the purview of the Insurance Code and obligate the parties to comply with a host of
statutory requirements and regulations.

Other principles of insurance include;

Principle of Proximate Cause;

This is also called the principle of ‘Causa Proxima’ or the nearest cause. This principle applies
when the loss is the result of two or more causes. The insurance company will find the nearest
cause of loss to the property. If the proximate cause is the one in which the property is insured,
then the company must pay compensation. If it is not a cause the property is insured against,
then no payment will be made by the insured.

12
Sprung v Royal Insurance (UK) Ltd [1997] CLC 70 (CA);
13
Robinson v Harman (1848) 1 Ex 850 (Exch).
Principle of Insurable interest

This principle says that the individual (insured) must have an insurable interest in the subject
matter. Insurable interest means that the subject matter for which the individual enters the
insurance contract must provide some financial gain to the insured and also lead to a financial
loss if there is any damage, destruction or loss.

Principle of Subrogation

Subrogation means one party stands in for another. As per this principle, after the insured, i.e.
the individual has been compensated for the incurred loss to him on the subject matter that
was insured, the rights of the ownership of that property goes to the insurer, i.e. the company.

Principle of Loss Minimisation

This principle says that as an owner, it is obligatory on the part of the insurer to take necessary
steps to minimise the loss to the insured property. The principle does not allow the owner to be
irresponsible or negligent just because the subject matter is insured.

In conclusion, the comparison between the insurance principles of indemnity and

utmost good faith is one that is highly debatable as both principles are very vital towards the
insurance contract since the insurance contract is not valid without any of them. But in my view
of the legal knowledge I have acquired from insurance law, it would consider the principle of
indemnity as the blood life of the insurance doctrine since at the end of the day, the main goal
of an insurance policy is restore the affected party to their former financial position before the
loss occurred the other principles only help to clarify the principle of indemnity.
REFERENCES

‘Modern Insurance Law’, (9th Edn, London Sweet and Maxwell 2013)

INSURANCE LAW TEXT AND MATERIALS’ (2nd Edn, Cavendish Publishing Pty Ltd 2002), 2

‘The early history of the contract of insurance’ (17 Col LR 1917) 85

‘Rawlings Insurance Law: Cases and Materials’, (2004), 129

‘Mysteries surrounding the material disclosure in insurance law’, (1984)

Prudential Insurance Co v IRC [1904] 2 KB 658

Bell v Lever Bros Ltd (1932) AC 161 (HL)

Department of Trade and Industry y. St. Christopher Motorists’ Association Ltd. (1974) 1 All ER 395

Guardian Assurance Co, Ltd v Osei (1966) GLR 762

March Cabaret Club & Casino Ltd v London Assurance [1975] 1 Lloyd’s Rep 169, per May J

Re Yager (1912) 108 L T 35-40, Channel J

Lindenau v Desborough (1828) 8 Barn & C 586

Rivez_v Gerussi (1880) 6 QBD 222

Banque Financiere de la Cite SA v Westgate Insurance Co Ltd [1991] 2 A.C. 249

Re Bradley and Essex and Suffolk Accident Indemnity Society {1912} 1 K.B. 415.

Fraser v Thames Television [1983] 2 ALL ER 101).