UNIVERSITY OF NAIROBI

INSURANCE LAW
INTRODUCTION TO INSURANCE LAW
1. INTRODUCTION

Insurance covers all areas of the economy. It concerns the cushioning of

economic and industrial concerns of losses that may occur causing hardship to
the owners of the property or business.

This course covers three broad areas:

a) The nature of the insurance industry and contract
b) The operative rules in the insurance mechanism
c) The scope, operation and limits of the principles which have evolved and
are in practice in the insurance industry.

a) Definition

In the case of Prudential Insurance Co. Ltd vs. Inland Revenue Commissioners
(1904) 2 Q.B. 655 insurance was said to be a contract where a person known as
an insurer undertakes in return for an agreed consideration called a premium to
be paid by a person called an insured or the assured to pay money or its
equivalent on the happening of a specified event or events.

In Gould vs. Curtis (1913) 3 K.B. 84 it was stated that insurance is a contract
where one party assumes 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
under which contract the first party is bound to pay or provide its equivalent if
the uncertain event occurs.

The Encyclopaedia Britannica has defined insurance as social device whereby a

large number of people through a system of equitable distributions may reduce
or eliminate certain measurable risks of economic cost resulting from the
accidental occurrence of disastrous events. The effect of insurance is to spread
the cost that would normally fall on a single individual in an equitable manner
over members of a large group exposed to the same hazard.

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b) Basic Characteristics of Insurance

i) the contractual basis of insurance

The insurance contract is a contract like any other. Insurance evolved basically
out of the rules of ordinary contract. In order therefore to have a valid insurance
contract it is necessary that the parties comply with and fulfil all the
requirements of an ordinary contract. Insurance like all newer areas of bargain
are specialty contracts, but subsuming ordinary rules of ordinary contracts.

ii) capacity of the parties

The capacity of the parties must be ascertained. Before the parties can enter into
a valid contract of insurance they must have capacity. Capacity in insurance is
not limited to the physical characteristics of the parties it goes beyond that. In
insurance capacity entails the presence of insurable interest. Insurable interest is
the proprietary or pecuniary interest that the insured or assured must prove first
and which is in danger of loss before he can take out a policy. If the insurable
interest is present there would be no bar for even a minor to protect such
interests by entering into a contract of insurance. Such other matters as sanity or
drunkenness may also be ignored if the insured or assured makes a full
disclosure of them before the contract of insurance is entered into.

iii) offer and acceptance

Before undertaking the contract of insurance there must be offer by one party
that is accepted by the other. The rules pertaining to communication by one
party to the other must be complied with.

iv) consideration

There must be consideration moving from the offeree or promisee to offeror or

promisor. Consideration takes the form of money payment called the premium
that the insured or his agent pays to the insurer. Premium may be paid as lump
sum or in instalments depending on the nature of the type of contract.

v) intention

Sufficient evidence of the intention of the parties to enter into a legally binding
contract, that is the intention to create the relationship. The intention may be
presumed from the nature of the bargain, but the presumption may be rebutted
by evidence to the contrary.

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vi) consensus ad idem

There must be a meeting of the minds of the parties, what is known as

consensus ad idem. The parties must be agreed on both the subject matter of the
contract of insurance as well as the terms under which the contract is to be
transacted.

c) The Nature of Insurance

i) it is an alleatory contract

The insurance contract is essentially an alleatory contract that is a contract in

the nature of a speculation. It deals with the future, and it has the element of a
contingency. The event upon which the enforcement of the contract is
dependent is in the future and is uncertain. An insurance contract is a game of
chance similar to adventures, gambles or other games of chance. The underlying
factor is that insurance is speculative in that it deals with contingent events,
which may either occur or not. This introduces the factor of risk.

In Prudential Insurance Co. Ltd vs. Inland Revenue Commissioners (1904) 2

Q.B. 655 the question of the alleatory nature of the contract was stated as one of
the cardinal characteristics of the insurance industry. It was observed that the
event insured against should be one that involves some amount of uncertainty.
There must either some uncertainty as to whether the event will ever occur or
not or if the event is one which must happen at one time or other there must be
some uncertainty as to the time when the event will occur.

ii) the adverse nature of the insured event

The event insured against must be of an adverse nature. Both the vent and the
consequent resultant from the occurrence must be of an adverse character to the
insured or assured. The insured or assured must stand to lose some interest or be
prejudiced by the occurrence of the insured event. An insurance contract unlike
a wager or a game of chance is not alleatory contract per se. Unlike wagers
where the interest is created by the contract itself in the insurance contract there
is a subsisting interest that the insurer promises to indemnify the insured should
the specified period which he contemplates the extent will act on the subject
matter with certain consequences.

In insurance the reason why the insured takes out a policy is not the contract
itself but rather the loss that he contemplates he will sustain by the occurrence
of the insurable event. In Robertson vs. Hamilton (1911) 14 East (HL), it was
observed that although both insurance contracts and wagering contracts are
speculative contracts risk is of the essence to the insurance contract and the
insured or assured is moved to effect the contract of insurance because of the
risk of loss and does not create the risk of loss by the contract itself.
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The requirement that there must an adverse effect before one can take out a
policy of insurance is to avoid mischief. Without insurable interest the policy of
insurance would be too mischievous. The insured can deliberately cause loss of
the subject matter in order to gain or reap the benefits of the policy. Adverse
effect is important since the party seeks to secure the economic interest of the
insured subject. The insured should be indemnified only if he suffers adverse
effects from the occurrence of the insured event.

iii) chance event

The event insured against must be accidental. Accidental is used to show the
fortuitous nature of the insured event as opposed to the intentional or the
unwilful nature of the event. When a person knows that an event will occur in
future and that certain consequences will flow from the same, it will be regarded
that there is no risk that such event will occur. If the event and the consequences
are expected they are ascertained and human nature need not waste time but
take steps to avert any undesirable consequences.

Uncertainty is closely related to the phenomenon of risk, which is the

foundation of insurance. The term risk in ordinary parlance is used to connote a
situation where there is a lack of knowledge about the future and the possibility
of certain adverse effects occurring. It connotes the interminable outcome in any
given situation. When risk is said to exist there must always be at least two
outcomes, one of which must be of an undesirable nature. In insurance risk
means a condition in which there is the possibility of an adverse deviation from
the desired outcome that is expected, and measurable by the possibility of a
financial loss. When the event is 100% certain there would be no risk, but where
chances are 50-50 a risk would be deemed to exist.

Insurance has been said to perform basically two roles, namely:

a) Transferring or shifting risks from the individual to a group by bringing
the individuals together under one scheme
b) Sharing or distributing losses evenly or an equitable basis among
members of a group and thereby reducing the impact of the loss which
the single individual would have suffered and hence the definition that
insurance is a social device which reduces or evens out losses which
would have fallen on the individual to the society.

Because it is possible to organise society in such a way that members who are
exposed to the same risks can contribute to each others losses the society
drastically reduces the burden which would have fallen on an individual in that
society by both sharing, shifting or distributing risks or losses. In order for
insurance to operate to share out losses on an equitable basis there must be some
apriori arrangement by which members of the same group are able to contribute

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to the scheme by the payment in advance of sums that will be able to meet the
full liabilities if and when they arise.

Insurance utilises two rules or principles, namely:

a) The law of large numbers or of averages. This deals with the likelihood
that something will happen in future and makes predictions of the
likelihood of such thing happening. The basic assumption is that things or
phenomena does not just happen randomly, but rather that given a certain
number of exposure units it is likely that a certain thing or phenomenon
will occur. Using this rule insurance companies are able to determine in
advance risks they are likely to expose themselves to in respect of any
given unit of insurable matter.
b) Past experiences or posterior probabilities or empirical data. Here a large
number or volume of data is collected in respect of each category of
insurable matter and determination made of the actual risks that have
attached from actual experiences in each category. From the past
experiences insurers can postulate what they will expect in future. For
example in motor insurance an insurer can determine the number of
accidents that over occurred over a given period of time and compute the
percentage thereof and from the percentage it would be possible to
determine or estimate what may possibly happen in future.

(d) Basic Prerequisites for the Insurance Contract

Before an insurance contract or scheme can operate the following must be

present:

a) The persons must have an interest in some thing or commodity that is of

value to that particular community or society. The interest must be
capable of being expressed in financial or pecuniary terms.
b) The insurance scheme only operates where the subject matter of
insurance is subject to loss by peril or destruction. It must be shown that
the person stands to lose should the subject matter be destroyed. The
subject matter must be of economic value.
c) it must be possible from a sufficiently large number of homogenous
exposure units to make the losses reasonably predictable based on the
law of large numbers and posterior probabilities. The larger the units of
exposure the better for the policyholder.
d) The losses produced by the risk insured against must be definitive and
measurable, and the measurement must be in financial or pecuniary
terms and not in emotional terms. The losses must be fortuitous or
accidental and must result from a contingency. The loss must result from
an event uncertain at least in terms of time, without which it would be
impossible to have a scheme of insurance. It would be futile to take out a
policy of insurance when it is certain that the event will occur since it is

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 possible to influence the occurrence of the event by other means. Such
events are likely to have certain undeterminable consequences.
e) The losses must not be catastrophic in nature, that is to say that the risk
insured against must be unlikely to produce losses too large in proportion
to the aggregate events insured against. This because insurance is based
on the notion of sharing out losses and sharing can only take place if the
number of losses at a given time is less than the total number of
aggregate contributions. For this reason losses caused by rioting mobs,
hurricanes, coups, earthquakes, mutinies and the like, are not insurable as
catastrophic losses are likely to arise from such activities.
f) The cost of insurance must be economically feasible in terms of
affordability by an average unit holder in any given category of
insurance.

2. PARTIES TO THE INSURANCE CONTRACT

The insurance contract is usually a bi-party contract, between the insured and
the insurer. Because of the requirement that the insured must furnish certain
information pertaining to subject matter of the contract the insured is invariably
the offeror or promisee and the insurer acts as the offeree or promisor. The offer
is usually made by the insured through the proposal form, which is evaluated
before acceptance by the insurer.

Any person who has normal contractual capacity may become an insured or
insurer and can enter into the contract of insurance. But because the insurance
contract is a specialty contract certain peculiar requirements have been brought
to bear before one can properly speaking be an insured or insurer. Some of these
peculiar requirements have evolved to meet the peculiar and specialty nature of
the contract of insurance in contrast to either ordinary contracts or other
specialty contracts.

a) Requirements for the insured

Anybody with contractual capacity may enter the contract of insurance so long
as he can show that he has an interest to secure or to cushion by taking out the
policy. This interest is what is described as the insurable interest.

In Lucena vs. Graufurd (1806) 2 Bos. & P.N. 269 (1806) L.R 813 it was stated
that a man has insurable interest in something to which advantage may arise or
prejudice happen. The interest need not be right to whole or part. Some relation
to or concern in the subject matter of insurance suffices in establishing an
interest capable of insurance. The relation or concern must be affected by the
peril so as to cause a damage or detriment or prejudice person. To be interested
in the safety of the insured subject or its preservation is to be so circumstanced

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in respect to it as to have benefit from its existence or be prejudiced by its
destruction.

Basically an insurable interest exists if the relationship between the subject

matter of insurance and the insured is such as to indicate that the insured will
benefit from the continued existence of such subject matter or suffer prejudice
or loss if such subject matter were to be destroyed. The interest must express
itself in monetary or pecuniary terms to the insured person. (See Sat Dev
Sharma (1966) EA 8).

As long as a party to an insurance contract can show a present insurable interest

his physical or mental capacity to enter a contract will not be an absolute bar to
his benefiting from the contract. Depending on the circumstances minors,
mentally insane, drunks, etc may still enter contracts of insurance so long as
they can show an interest in the subject matter and so long as they can disclose
their physical or mental inabilities. (See Clements vs. London & N.W Railway
(1894) 2 QB 492, Imperial Life Assurance (1902) 22 CLR 417 and Taylor vs.
Walker & others 1 Lloyds 490).

b) Requirements for the insurer

Only persons who are allowed in law to undertake insurance business can act as
insurers. Traditionally two concerns undertake insurance business, namely: (a)
limited liability companies incorporated under company legislation and (b)
underwriting associations, particularly the Lloyds of London underwriters
associations.

(i) Limited liability companies

Although anyone can undertake insurance business, a succession of legislation

has restricted greatly the class (es) of persons allowed to engage in insurance
business. This has something to do with the peculiar nature of insurance in
terms of financial liability and accountability. It requires certain accounting
procedures not expected of other business organisations. Because of this
peculiar nature it has been necessary for a variety of restrictions with the result
that the bulk of insurance business can only be undertaken by a particular breed
of limited liability companies. Although insurance companies are registered
under the Companies Act there are extra regulations with regard to them. These
are to be found in the Insurance Act (Cap 487).

The insurer is defined under the Insurance Act as the person who enters into an
insurance contract and is so permitted by law. The Act elaborates the categories
of persons permitted to carry out insurance businesses. Section 19 no person
should undertake insurance business (which includes reinsurance) unless they
are registered by law. There are some exceptions to this.

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(a) Under proviso to section 19(1), persons who have been undertaking
insurance prior to the commencement date of the Act (the commencement
date of the current Act was 1st January 1987).
(b) Under section 20, the placing of reinsurance business to companies not
registered as insurers in Kenya.
(c) Under section 21, insurers who are undertaking closed fund business. This
refers to business that is non-active or an expired business carried on by a
company that has wound up its business in a given locality.

Before a company can qualify to undertake insurance business it must satisfy

the requirements of section 22, to the effect that the proposed insurer must be a
body corporate incorporated under the Companies Act, owned wholly by
citizens of Kenya or by the government or generally have as members some
portion of Kenya citizenship with specified capital holding. Some of the key
requirements are:

a) Interest Controlled by Kenyans. To be eligible for registration at least

a third of the shares in the company must be controlled or held by
Kenya citizen, either as paid up shares or voting rights. Under section
23 the amount of share capital depends on the sealing of the share
capital of the company. Where the amount of paid up capital is Kshs.
5,000,000.00 the local ownership should be at least 51%. Where share
capital or assets exceed Kshs. 5,000,000.00 but are less that Kshs.
10,000,000.00 the Kenyan holding must be at least 33½ %. Where the
share capital of the company is in excess of Kshs. 10,000,000.00 the
percentage of local holding must be at least 26½ %. Without the
satisfaction of this requirement the Commissioner of Insurance may
refuse to register the company.
b) Actual structure of the Capital of the Company. Unlike ordinary
companies, an insurance company can only be registered if there is
evidence that its share capital is paid up at least to the extent of Kshs.
5,000,000.00 under section 25 all shares in an insurance company
should be in form of ordinary shares in order to avoid variations in
obligations that shareholders may have in the company. By virtue of
sections 22 and 23 the minimum shareholding in any insurance
company is placed at Kshs. 5,000,000.00 paid up share capital or
assets to ensure that policyholders are protected in the event the
company goes bust. This distinguishes the insurance company from
other companies.
c) Special deposits in Central Bank of Kenya. In addition to structure,
the company should comply with section 32 by making special
deposits with the Central Bank of Kenya, which should be an extra
protection of policyholders. Under section 32 an insurer applying for
registration should deposit and keep deposited with the Central Bank
of Kenya in Kenya government securities or bonds sufficient to

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 secure the interests of policyholders. The deposits must comply with
the following schedules:
i) Where the insurer applies for registration to undertake
long-term insurance the deposit required is Kshs.
1,000,000.00.
ii) Where application is to do general insurance business the
deposit should be a minimum of Kshs. 500,000.00.
iii) Where the insurer applies to do both long-term and general
insurance business the deposit should be a minimum of
Kshs. 1,000,000.00 for long-term business and Kshs.
500,000.00 for general business.
This is supposed to act as extra security. under section 38, the
deposit may
not be used for the purposes of the insurer or treated as property of
the
insurer (e.g. it cannot attached in an execution), it can only be
utilised
for payment of policy holders upon failure by the insurer to honour
its
obligations under insurance contract. Under section 40 the
Commissioner
of Insurance has power to enhance the deposit requirements of any
insurance company if the assets of the company have increased to
such
extent as to necessitate additional security. This ensures that there is
enough money to settle claims.
d) Reinsurance Arrangements. Before an insurer can be registered it is
required that the insurer must show to the satisfaction of the
Commissioner of Insurance adequate reinsurance arrangements.
Under
section 20 no insurer or broker can be registered as such without
showing
adequate reinsurance arrangements. Reinsurance is one of the
mechanisms
peculiar to insurance. The insurer is supposed to show that they
have
ceded their liability to other insurers to sufficiently cushion the
insurer
against the possibility of the insurers business going bust.
Reinsurance
serves the purpose of ensuring that when liability attaches there is
no
danger that the liability will be unpaid on grounds of the unstable
financial base or debts of the company. Reinsurance is
required by law to be taken by the insurer before the insurer can be
registered. Sections 145 to 149 sets out the mandatory reinsurance
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 arrangements that must be made in Kenya. Under section 145 all
insurers
undertaking business in Kenya must cede at least 30% of their
business.
the insurer may make reinsurance arrangements beyond those set
out in
section [Link] objective is to diversify risk.
e) Margins of Solvency and Investments. Insurance companies are
required to keep or maintain certain levels or margins of solvency
keep statutory funds and have clearly designated investment
portfolios. This is intended to ensure that the business of insurance is
run for the benefit of the policyholder.
 Margins of solvency. Under section 42 insurers are required at
all times to keep admitted assets more than the admitted
liabilities. General business insurers should have admitted
assets maintained at Kshs. 3,000,000.00 over their admitted
liabilities. An insurer taking both long-term and general
business must maintain in respect of each category Kshs.
1,000,000.00 and Kshs.3, 000,000.00 respectively. Under
section 42(2) assets of each category of insurance business
must be maintained separately and audited on an annual basis.
 Statutory funds. Insurers are also required to establish and
maintain statutory funds in respect of each category of
insurance. The assets so invested must be kept separate from all
other assets of the insurer and cannot be used without the
consent of the Commissioner of Insurance. Under section 46
insurers are required to establish as many statutory funds as
there are types of business ran by the company. Such funds can
only be utilised as a last resort in order to secure policyholder
interests.
 Statutory Investment Portfolio. In addition to funds, insurers
are required to maintain statutory investment portfolios. Under
section 48 insurers are required to invest their funds in given
portfolios in order to attain three major considerations: (a)
security for policyholders (b) liquidity for operations of
insurance companies and (c) income at the end of the
investment. Sections 49 and 50 give insurers an indication of
the types of portfolio investments they can undertake.

(ii) Underwriters

The history and development of insurance is associated with the notion of

underwriting. Underwriters undertook the first type of insurance before the
period of chartered companies. The underwriter is a person promising or
undertaking to take legal responsibility in accordance with a given agreement
for purposes of fulfilling future obligations. An underwriter need not undertake
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to take responsibility for the whole liability. It is enough that portion of liability
which remains is underwritten by some other insurer.

In the context of insurance underwriting took and takes the form of individual
persons signing on the policy stating that they would take legal responsibility
for a portion of the liability which is the subject of the policy. It may take
several underwriters to fully take responsibility of any one given risk.
Underwriter can be different from insurer.

Underwriting as a practice originated at the Lloyds coffee house in London in

the 16th century. Through practices and operations at Lloyds , underwriting was
systemised to become a trade of its own. From humble beginnings the Lloyds of
London Association was started, and it generally serviced merchants and traders
of various types in the Middle Ages in England. Apart from actual underwriting
of liability Lloyds became a registry where basic information on ships and their
merchandise would be received and exchanged between merchants. The Lloyds
of London practice of underwriting remains in place to date.

In Kenya there are two basic underwriting terms: the Lloyds of London
Association, which operates on traditional terms, and the underwriting business,
operated by AON-Minet. The AON-Minet began operations in Kenya as a joint
venture between the Industrial and Commercial Development Corporation
(ICDC) and Minet. Registration in respect of underwriting work is dealt with
under section 19(2).

(iii) Brokers and Agents

Apart from corporations/companies and underwriters, two types of

intermediaries known as brokers and agents undertake a substantial portion of
insurance business. These two undertake 30% or so of the insurance business in
Kenya.

Although there is little distinction between the broker and the agent per se, a
broker has been said to be a general agent that is not tied to any particular
insurer or insured, and acts as a purveyor of information with regard to
insurance business. In law a broker is an agent of the insured, unless the specific
agreement states that he acts for the insurer. An agent per se is normally a
person or persons who are tied to the insurer and performs functions that are
specific to that insurer. In certain instances, however, an agent per se may act
for the insured and where he does so full liability will fall on the insured for all
acts done by such agent.

Both brokers and agents operate generally for the purposes of enhancing
insurance business, and they must take instructions from their principal who
may either be the insured or the insurer. Both therefore operate generally under

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the law of agency and must comply with both the contractual duties and specific
obligations that the principal may require of them.

The liabilities of brokers and agents to the principal are covered under section
81(2), which has altered the common law position in regard to liabilities of the
agent to his principal.

3. CATEGORIES OF INSURANCE

There are various approaches to the categorisation of insurances. Categorisation

depends on the strand or the fundamental element that is operative in the
insurance contract. There are four approaches: (a) the nature of the risk or event
on which the sum insured against becomes payable, (b) the nature of the interest
affected, (c) the nature of the contract of insurance and (d) the fundamental
nature of the programme of insurance.

(a) Nature of Risk or Event Insured Against

Under this category the name of the insurance contract takes after the event that
the insured secures. This is the more popular of the classifications which most
legal texts adopt. Contracts of insurance classified here include marine, fire, life
assurance, accident or casualty insurance, burglary, fidelity, workman’s
compensation, motor vehicle insurance, crop hypothecation, among others.

Marine insurance basically insures marine adventures and the sum is payable
when the perils of the sea touch on either the ship or the merchandise that is the
subject of transportation. This is the oldest type of insurance contract that was
undertaken and most of the so-called insurance principles grew from the
experiences of maritime trade. Fire insurance insures against destruction
property by fire. Its origins are traced to the Great London Fire of 1710. Life
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assurance, also known as death assurance, emerged in the middle of the 18 th
century. It assures payment of money after the death of the insured or upon
expiry of a particular programme. Accident or casualty insurance insures
against loss or damage arising from accidents.

Burglary insures against forms of theft. Fidelity insurance covers employers

against loss occasioned by dishonest employees. Workmen’s compensation
insurance or schemes insure employers from the loss that comes with
employees being injured during the course of employment. Motor insurance
may be either third party, which is compulsory, or comprehensive. It covers
motor vehicle owners from the losses to which they are exposed from the use of
motor vehicles. Crop hypothecation operates on the same terms as a guarantee.
The farmer takes out the policy to insure his harvests.

(b) The Interest Protected By Insurance

The second broad category takes into account the nature of the interest protected
by the policy. Here the contract is distinguishable by the manner in which the
insured is affected by the risk covered or insured against. There are three
interests in this classification.

(i) Personal interest

The contract of insurance is named on the basis of the personal interest of the
insured in the subject of insurance or on his personal involvement. The
categories under this classification include pure life assurance, accident
insurance, personal endowment (a time policy, for example founded on the life
of the insured person where the sum is payable within a given period of time
regardless of whether death occurs or not) and sickness insurance (not very well
developed in Kenya because of the competing scheme under the National
Hospital Insurance Fund Act). The major concern here is the personal interest of
the insured.

(ii) Proprietary Interest

In property insurance the insured insures his interest in the property. The
purpose of the policy is to cover the insured against the destruction of the
property. The broad term property insurance is used to cover all types of
policies where the insured is taking out the policy for the purpose covering his
property. The categories of insurance falling under this classification include:
marine, fire, burglary, fidelity (trust with regard to employees and property),
comprehensive motor, insolvency (big time investment) and crop
hypothecation.

(iii) Liability

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Liability insurance arises where the nature affected is a liability which may
befall the insured and which the law demands he should meet as against third
parties. Within this category, the major concern is that the operations of insured
may give rise to liability that is of such nature as to affect the lives of third
parties, which lives may be depressed if sufficient compensation is not
available. The liability on the part of the insured must be guaranteed by way of
taking out a policy of insurance. The categories of insurance falling under this
classification include: compulsory third party motor insurance, workman’s
compensation, sickness insurance and reinsurance schemes.

The compulsory third party insurance is taken out by motor vehicle owners
securing liabilities, which may arise as a result of use of motor vehicles on the
road. The policy is a mandatory requirement for motor vehicle owners or users
under the Insurance (Motor Vehicle Third Party Risks) Act (Cap 405). The
workman’s compensation scheme attempts to secure liabilities, which may arise
or befall employers in respect of their employees. It operates under the
Workmen’s Compensation Act (Cap 236). Sickness insurance is a scheme that
secures liabilities to the employee arising from employee sickness. The scheme
currently operates through the National Hospital Insurance Fund, which is a
statutory body, established under the National Hospital Insurance Fund Act
(Cap 255). The Insurance Act requires a compulsory reinsurance scheme for
insurers, compelling insurers to enter into reinsurance arrangements.

(c) The Nature of the Contract

Under this classification the focus is on the type of the contract of insurance.
Contracts of insurance are divided into indemnity and non-indemnity contracts.
The classification of insurance contracts normally takes into account the broad
nature of the insurance contract.

(i) Indemnity Insurance

The indemnity contract is one where the amount recoverable by the insured is
measured by the extent of the pecuniary or financial loss suffered or sustained
by the insured. Categories of indemnity insurance include: marine, fire,
property, burglary, and fidelity, among others. It covers all types of insurance
where there is property.

(ii) Non-indemnity Insurance

The non-indemnity contract is one where the amount is recoverable by the

insured is secured by the payment of a specified sum of money regardless of the
actual loss sustained by the insured.

(d) The Fundamental Nature of the Programme of Insurance

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This classification takes into account the programme of insurance in terms of it
being individual or private, or whether it is public in the broad terms of having a
social utility function. Therefore, insurances may be put in two broad types:
private insurance contracts and social insurance contracts.

(i) Private Insurance Contracts

Private insurances consist of voluntary insurance policies. The crucial factor is

whether the individual insured has voluntarily opted to take out a policy and the
interests he proposes to cushion himself against. The policy is private and
voluntary or consensual in the sense that the insured bargains out the terms on
which he will take out the policy. There is no compulsion, either by law or other
sanction to enter the contract. This covers all policies that are either personal or
proprietary, including fire, life, marine, burglary, and accident, among others.

(ii) Social Insurance

Social insurances are compulsory and some law or other external social sanction
imposes their effects. The main purpose of social insurance is to provide for
members of a particular society against losses that are so widespread as to be
considered fundamental to society itself. Protection here is not so much to the
individual insured but rather to society at large on the basis that the burden that
may be imposed on the insured may be so large as to be inadequately borne by
him and yet the resultant effect would be of such magnitude as to deprive a
certain section of the community adequate standard of living.

Social insurance is a device for pooling funds together for purposes of providing
certain benefits to a generalised section of the community, which may be
exposed to certain categories of hazards. In developed countries such as
England the incidence of social insurance is so widespread as to cover every
aspect of social welfare. In Kenya social insurance is still fairly young. It is
scattered and spatial. Only a small section of the community benefits within
very specific categories. The categories include: compulsory third party motor
risks scheme (under the Insurance (Motor Vehicle Third Party Risks) Act (Cap
405), isolated pension schemes of various types, workmen’s compensation
(under the Workmen’s Compensation Act (Cap 236), sickness insurance (under
the National Hospital Insurance Fund Act (Cap 255), provident fund schemes
(under the Provident Fund Act (Cap 181) and reinsurance schemes (see Part
XIII of the Insurance Act).

4. EXTENT OF INSURANCE RISK

The extent of risk is important in several ways. It gives some indication both to
the insured and insurer of the nature and type of liability that they will shoulder
15
or have to undertake in the event the risk insured against attaches. For the
insurer the extent of risk or cover is important because it will determine his
duties and liabilities under the policy of insurance which include an adjustment
of the premium rateage to suit the type of burden that he may undertake should
the policy mature.

For the insured the extent of risk or cover is important because it will give an
indication to him both in respect of the consideration that he must furnish and in
respect of any extra security that he may undertake in order to fully cover the
subject matter. If the policy only covers a portion of the subject matter a prudent
insured would want to take remedial action by taking out a policy with another
insurer in order to fully secure the subject matter.

The extent of cover or risk may be determined by three factors: (a) the extent of
time cover, (b) the extent of subject cover and (c) the event or events covered.

(a) Time Cover

The time covered by the policy will normally be the subject of express
declaration or terms in the policy in relation to the time or period when the
policy runs. As a general rule insurance companies will state the time in which
the policy will run, which includes the time on an hourly basis when the policy
commences and the period of cover and normally in express statement when the
policy will expire.

When there has been a time stipulation the insurer is only liable under the policy
if and when the risk insured against attaches or occurs during the currency of
the policy. Any liability that attaches outside the time stipulation is not a
liability for the purposes of the policy. It is immaterial that the insurer is
informed of the loss or attachment of the liability outside the time cover if in
fact the risk attached within the time stipulation.

In the absence of express time stipulation on time in the policy the policy is
supposed to run from the second day after the day and date named in the policy
and therefore expires on the next day stipulated in the policy. The time when the
policy commences is from midnight of the day of commencement. For example,
if a policy names the 4 th September 2006 as the commencement date without
any time or hour specification and is said to run for thirty (30) days then that
policy will run for consecutive thirty (30) days from 5 th September 2006 to the
full period. In Cornfoot vs. Royal Insurance Company Limited (1870) 5 Ex. 296,
it was observed that a policy stated to last for six (6) months from 14 th February
to 14th August excluded 14th February and commenced on midnight 15th
February.

If, however, only the hour is stated without stating the date when it is meant to
commence, it may be assumed that the parties meant that only full days are to
16
be counted and therefore ignore the hour specification. In Cornfoot vs. Royal
Exchange Insurance Company (1904) 1 KB 413, a policy of insurance for all
perils of the sea was taken out by the plaintiff on the arrival of a ship in some
harbour. The ship was properly parked in the harbour at 11.30 am on 2 nd August
1902 when the policy came into force. The ship remained there till 2 nd
September 1902, was totally destroyed at 4.30 pm on the last day of the policy.
The policy had a currency period of thirty (30) days running from the
commencement time. The issue was whether the policy was still current at 4.30
pm on 2nd September 1902 when the ship was destroyed, and therefore whether
the ship was current at the time. It was held that the expression ‘thirty (30) days’
in the policy meant thirty (30) consecutive periods of twenty-four (24) hours the
first of which began at 11.30 am on 2 nd August 1902. the insurance cover had
come to an end before the loss occurred at 4.30 pm on 2nd September 1902.

In Cartwright vs. MacCormack Trafalgar Insurance Company Limited (1963) 1

WLR 18, a cover note1 issued on 2nd December 1959 in respect of a motorcar.
The note stated that it commenced at 11.45 am and was supposed to run for a
period of 15 days. The specific provision stated ‘this cover is only valid from
the commencement date of the risk’. Under the heading “Time” was written
11.45 am and under the heading “Date” was written 2nd December 1959.
Immediately after the time and date provisions it was stated ‘under no
circumstances is the time and day of commencement of risk be prior to the
actual time of the issue of the cover. In any event the duration shall not be more
than 15 days from the day and date of issuance herein stated’. At 5.45 pm on
17th December 1959 the insured motor vehicle collided with an infant. The issue
was whether at the time of the accident the cover was still in existence. It was
held that by the time the accident took place the cover note was still in existence
and notwithstanding the time stipulation it should be considered that the cover
note commenced on the midnight of 3rd December 1959 and therefore was due
to expire on 18th December 1959.

Where a policy does not stipulate the time the policy commences and ends the
expiry time will calculated in times of twenty-four (24) hour periods
commencing from the midnight of the next day.

(b) Subject Matter Cover

It is important that the parties to the contract state with clarity the subject matter
over which the policy was being taken. It is crucial that the parties must be at
consensus ad idem in respect of every aspect of the subject matter of insurance.
If the policy is in respect of a house, both the insured and the insurer must be
talking of the same house, its quality, location and the risks that are proposed to

1
A cover note is a document which must be brought to an end by an express statement by acceptance and issue
of a policy or rejection of the proposal. In its nature the document gives its commencement but its expiry will
either be brought about by the actual issue of the policy or the rejection of the proposal. Should the insurer opt
not to cover the interest he should notify the insured so that he could make alternative arrangements.
17
be undertaken in respect of it. If it is a life in issue, the parties must be clear
about the life or lives that are at issue in respect of the loss.

Several matters must be stated clearly in identifying the subject matter. The
nature of the subject matter must be stated. The insured is expected to give a fair
amount of detail of the nature of the subject matter he seeks to secure. There
should also be a general statement of the general condition or state of affairs of
the subject matters of insurance. It is crucial that the insured states the condition
in which the he knows the subject matter of insurance to be in. In respect of a
house, for example, its general state, its location and value should be stated.
With respect to life, what should be stated should include the health, occupation
and the risks to which the proposed life is exposed.

In availing information respecting the subject of insurance there has been a

move or tendency towards the insured person being considered as having a
monopoly of information. This is because the insured either has physical control
of the subject or has been dealing with the subject matter for a long time so that
he knows the extent to which the subject matter is exposed to risks. It is no
excuse that a particular insured does not know what an ordinary reasonable
person ought to know of the subject matter he wishes to insure. If a reasonable
person would know a particular fact the insured would be liable under the
doctrine of non-disclosure.

In London General Omnibus Company Limited vs. Holloway (1912) 2 KB 72, it

was stated that ‘the person seeking to insure may fairly be presumed to know all
the circumstances which materially affect the risk and generally is as to some of
them the only person who has knowledge. The underwriter whom he asks to
take the risk cannot as a rule and rarely has the time or opportunity to learn by
inquiry circumstances which are or may be most material to the formulation in
his judgement as to his acceptance of risk and as to the premium which he ought
to charge’.

In Joel vs. Law Union and Crown Insurance Company Limited (1908) 2 KB
863, a woman took out a policy upon her life, in pursuance of which she made
certain statements the truth of which was not disputed. She signed a declaration
to the effect that the statements made were to the best of her knowledge and
belief true, and further that both the declaration and the statement would form
the basis of the contract. She was subsequent to her executing the policy
questioned by a doctor sent to her by the insurer. One of the questions inquired
as to whether she had a history of mental derangement, to which she answered
in the negative. It turned out that, although she was not aware, she had been in
confinement for acute mania and had suffered from a nervous breakdown
following a bout of influenza. She subsequently died, and on a claim by her
estate the insurer disclaimed liability arguing that the insured had made a
material non-disclosure or misrepresentation in respect of her history of mental
derangement. Notwithstanding the innocence of her not knowing that the
18
nervous mania and bouts of influenza were symptoms of mental derangement,
she was still found liable of non-disclosure. It was held that having regard to the
true nature and purpose of the question the answers to the question were not
true. On the construction of the documents made part of the basis of the
contract, in respect of the second series of questions put to her by the doctor she
would have made a material non-disclosure or misstatement which would have
been fatal to the claim.

(d) Event Insured Against

The event insured against is normally fashioned in two broad ways: (a) in a
general statement of the type of cover that the insured proposes to undertake
and (b) in warranties, conditions and other terms.

(i) Statement of Type of Cover

The statement covers the events in broad terms by way of the category of
insurance sought. For example, an insured seeking to cover himself against
liability from fire, life, personal accident, marine, burglary, etc will have his
policy specifically state that the insured events are in respect of fire, life,
personal accident, etc. Whereas this is useful, it is not always detailed enough.

In Samuel & Company Limited vs. Dumas (1924) AC 451, the master of a ship
with the connivance of the owners abandoned the ship on high seas and set it on
fire for purposes of receiving policy money. Meanwhile was ship was also
insured by a mortgagee in bankruptcy who had several credits with the owner.
The mortgagee sued for payment of the accrual sum being the value of the
mortgage under the policy. The insurer resisted payment on the grounds that
that the ship had been lost in the high seas by the malicious intentions of the
owner and the insurer was therefore not liable to pay in respect of any other
interest. The issue before the court for determination was whether the
abandonment and setting on fire of the ship was an insured event within the
terms of the policy, and whether the mortgagee in bankruptcy had a vlid claim.
It was held that the loss of the ship by abandonment and setting on fire was not
a loss by a peril of the sea, the loss by abandonment and setting on fire was not
included in the general words and clauses of the policy.

In Nasser Mohamed Omar vs. Prudential Assurance Company Limited (1966)

EA 79, the appellant owner of the insured car which was usually driven by an
employee of his in the course of employment. On one occasion the employee
drove it off the road on to the seashore, changed gears and the car slowly went
into the sea. The employee failed to control it. The car was not recovered from
the sea for several days by which time it had become a total wreck the appellant
made claims for both the value of the car and for consequential loss. The insurer
disclaimed liability arguing that the event causing damage was not accidental
collision or overturn within the terms of the policy. The insurer relied on a
19
clause which stated ‘the company will indemnify the insured against loss of or
damage to the motor vehicle and its accessories, and spare parts caused by
accidental collision or overturn upon mechanical breakdown or subsequent
upon wear and tear’. Spry J in determining whether the act of the employee was
within the terms of the policy observed that ‘in the absence of any authority or
evidence to the contrary the words used in any contract must be given their
ordinary and current meaning. …the word collision has acquired in ordinary
usage a meaning wider than the strict etymological sense and (there is) no
reason to suppose that the parties to a contract of motor insurance would have
intended to import the principles of marine insurance into motor contract. A
collision is undoubtedly an impact and …it imports at least some degree of
violence. One might in modern parlance refer to collision with a tree…in some
circumstances a car can be said to have collided with a body of water, but where
the substance encountered is of a yielding nature the degree of violence
necessary to establish a collision can only come from the speed of the vehicle.
So where a motor vehicle is driven into the sea…in the present case the car was
slowly indeed driven into the sea, it would… be an abuse of language to
describe the contact as a collision.’

(see Societa Coloniale Italiana and another vs. South British Insurance
Company 14 KLR 84

(ii) Warranties and Conditions

In addition to the general and broad statement of the event covered, many
policies also utilise the facility where the specified event to be covered in the
policy is detailed out through warranties, conditions and other terms in the
contract in order to specifically indicate what matters will give rise to liability
under the policy and what matters will be excluded or exempted under the
policy.

(iii) Exemptions/exception Clauses

There are accepted stereotype exclusion clauses in various categories of

insurance. For example in fire insurance, policies will obviously exclude on
various basi
s as events not insurable fires that are domestically caused, whether caused
intentionally, maliciously or innocently. In life insurance, exclusion clauses
cover death by natural hazards such as quakes, thunderstorms, hailstorms,
hurricanes, etc, and death caused by suicide or other intentional means. In motor
insurance, exemptions cover injury or death caused by mechanical defects of the
motor vehicle, injury or death caused by intentional or reckless driving or injury
caused by unlicensed and unauthorised drivers.

(iv) The Proximity Rule and Consequential Loss

20
Section 55 of the Marine Insurance Act provides that the ‘insurer is not liable
for any loss attributable to wilful misconduct of the insured or his agent, unless
the policy otherwise provides he is liable for any loss approximately caused by
the peril insured against even though the loss would not have happened but for
the misconduct or negligence of the master or crew.’

If the loss occurs or results from a series of events, rather than a single and
determinable event, which events may not be the events insured against, the
situation will have to be looked at from the view of the test of causation. The
question of what is the proximate cause of the loss is fairly central in
determining the liability of the insurer

It has been recognised that in life there may be an endless sequence of events,
which ultimately lead to a particular result or effect. At every given point in
time it must be possible to isolate the event or events that can be attributed the
law of effect. Notion demands that any particular event whether insured against
or not should not be treated as operating independently of anything else in
causing a result or results. The effect of any particular event should be seen as a
link in a chain of causes or effects that might be for long indefinitely into the
past, having a continuous past. Be it as it may life is a continuous process, the
law refuses to be drawn into the subtleties of having to be drawn into infinite
past in order to determine the cause of a particular event. Law is satisfied to
look exclusively to the immediate or proximate cause and not all the causes
preceding the immediate one, which the law recognises as being remote. The
immediate proximate cause is not necessarily the last cause, but the most direct
dominant operative or efficient cause resulting in a particular effect or effects.
In every given or claimed situation facts of the loss must be looked at to see
whether there was a succession of causes which might in fact have contribute to
the loss. The parties must ascertain which of the possible successive causes is
the dominant direct operative or efficient one on which the loss is or can be
attributed to within the meaning of the policy. It is that cause which will be
isolated as the cause within the terms of the policy.

In Leyland Shipping Company Limited vs. Norwich Union Fire Assurance

Society Limited (1918) AC 350 the court commented on the notion of proxima
causa. It was stated that the proxima causa should not be treated as the cause
nearest to the effect. Causes are to be spoken of as if they were distinct from
one another, as beads in a row or links in a chain. A chain of causation is a
handy expression but it may be inadequate. Causation is not a chain, but a net
and at each point inferences, causes and events precedent and simultaneous may
meet. The radiation on each point extends indefinitely and at each point various
influences meet. The cause that is truly proximate is that which is proximate in
efficiency, although other causes may have sprang up which have not yet
destroyed or truly conquered it. It may culminate in a result of which it remains
the real efficient cause to which the event can be ascribed. 2
2
See also Hamilton Frazier & Company Limited vs. Pondolf (1887) 12 AC 518 29.
21
In Lawrence vs. Accidental Assurance Company (1881) 7 QBD 216, (1881-2)
45 LT 23, the defendant, by a policy of insurance agreed to pay to the
representative of the insured a certain sum of money if the insured sustained any
personal injury caused by accidental and external violence within the meaning
and the conditions of the policy, and the direct effects of such injuries cause the
insured’s death. The policy provided that the same insured payment only in case
of injuries accidentally occurring from material or external causes operating
upon the person of the insured where such accidental injury is the direct and
sole cause of the death of the insured. The policy did not cover death arising
from fits or any diseases arising before or at the time or following such
accidental injury (whether consequent upon such accidental injury or not, and
whether causing such death or disability directly or disability directly or jointly
with such accidental injury). While the policy was in force, the insured was
seized by a fit while standing on a railway platform and fall on the line and was
instantly killed by a locomotive engine that was passing at the time. In an action
by the administrator of his estate it was held that the death was caused by an
accidental injury within the policy, to which the exclusion did not apply.
According to Williams J “… we must look at the immediate and proximate
cause of death and that would be the injury caused by the engine passing over
the deceased…I put my decision on the broad ground that the death in this case
did not arise from the fit, but from what happened afterwards.”

In Jupiter Insurance Company Limited vs. Bajaber Hasham & Sons (1960) EA
592, the insurer insured a vehicle against loss or damage caused by accidental
collision, theft or malicious act. The policy had an exclusion clause to the effect
that the insurer was not liable for any accident or damage or claims of any
nature when a person who was not sober or was under the influence of liquor or
drugs drives the vehicle. At the material time the vehicle was being driven by an
employee of the insured, who had been directed to take the car to a garage, but
contrary to instructions he went on a frolic of his own at drove the car to
Korogwe some 102 miles away. While there he got drunk, and subsequently had
an accident where the vehicle was reduced to a total loss. It was an accepted fact
that in driving all the way to Korogwe the driver had not stolen the car but had
converted its use which conversion did not amount to theft. The insurer declined
to pay under the policy pleading the exclusion clause; the driver drove under the
influence of drink. The insured argued that the cause of the accident was not the
intoxication of the driver, but the driver’s malicious act of converting the use of
the motor vehicle as a result of which he was involved in an accident. The court
had to determine the proximate cause of the accident between the intoxication
of the driver and his malicious conversion of the car. It was held that the
immediate and proximate cause was the continuing malicious act of converting
the motor vehicle, which was the dominant cause of the loss.

22
5. THE BASIC CONCERNS IN THE FORMULATION OF THE POLICY

INSURABLE INTEREST

Insurable interest if fairly central to any contract of insurance. It was introduced

as a requirement for any contract of insurance as far back as 1746 under the
Marine Insurance Act, 1746. From marine it was extended to other categories of
insurance, life assurance in 1776, fire insurance in 1842 and burglary in 1887.

Insurable interest is the pecuniary or financial interest that is at stake or in

danger of loss should the intending insured opt not to take out a policy on the
subject matter of insurance. The notion of insurable interest was defined and
given legal effect as far back as 1806 in, where Lawrence J stated that a man is
interested in something or in a thing to whom advantage may arise or prejudice
happen from the circumstances which may attend it and to whom it imported
that its condition as to the safety or other quality depends. Interest does not
necessarily imply a right to the whole or part of a thing nor necessarily or
exclusively that which may be the subject of privation, but having some relation
to or concern in the subject matter of 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 insured. To be interested in the
safety of or preservation of a thing is to be so circumstanced in respect as to
how benefit to its existence and prejudice from its destruction. The relation
between the insured and the subject of insurance must be such that the insured
would consider ways and means of its preservation.

The definition given in Lucena vs. Craufurd (1806) 2 Bos & PNR 269 was
adapted in the Marine Insurance Act 1822, and is still reflected in the present
law, which states that a person has an insurable interested in the subject matter
of insurance where he stands in a legal or equitable relation to the adventure or
to any insurable property or risk in consequence of which he may benefit by the
safety or due arrival of the insurable property or may be prejudiced by its loss or
damage thereto or by its damage thereto or incur liability in respect of such loss.

Sections 7 to 15 of the Marine Insurance Act enumerate several situations where

insurable interest has been declared in respect of marine adventures. These
include where the subject matter is of a divisible nature 3, any contingent
interests4, any contractual interests5, any partial interests (whether joint or
common)6, insurance interests (reinsurance)7, all interests on bottomrey8,
interests by master of a ship or member of a ship in respect of their wages 9, any
3
Section 7(1)
4
Section 7(2)
5
Section 7(3)
6
Section 8
7
Section 9
8
Section 10
9
Section 11
23
mortgagor’s interests10, any mortgagee interests11 and interests out of any
assignment.

In respect of life assurance the Insurance Act, at sections 94 to 96, sets out the
situations where the law recognises existence of insurable interest. Under
section 94 a policy of life assurance cannot be in force where there is no
insurable interest by the person purporting to take such policy. It will be deemed
to exist where a parent of a child who is under the age of eighteen or a person in
loco parenthis takes out a policy on the life of the child to the extent of funeral
expenses, a husband in the life of his wife and vice versa, a person in the life of
any other person upon whom he is wholly dependent for support and education,
a corporation or other person in the life of an officer or employee of that
corporation or other person, and a person who has pecuniary interest in the life
of another person whether such pecuniary interest is in contractual or other
terms. Section 96 limits the extent of a parent’s interest in the life of a child in
the event of such child dying before the parent to repayment of the premium
payments or instalments and any interest on the monies paid to the insurer.

At the general level courts have devised several rules, which determine whether
or not an intending insured has insurable interest in the subject matter of
insurance, and whether such insured is able to claim under such policy. These
rules are referred to as tests of insurable interest. They are to the effect that there
must be a direct relationship between the insured and the subject of insurance,
which relationship must arise out of a legal or equitable right or a legal or
equitable liability, which right or liability must be capable of pecuniary or
financial estimation or quantification, and the liability arising from the insured
event would be directly incurred by the insured in the event that there is loss or
destruction of the subject of insurance. If all four of the above conditions are
present and positive then the insured can be said to have insurable interest. If
they are not present there would be no insurable interest and the insured would
not be entitled to claim under the policy.

In Insurance Company vs. Stimson 103 US 25 LED 573, the respondent was a
contractor who built a hotel at a cost of US$ 25, 000.00. Upon completion of the
construction the owner did not take over the building immediately whereupon
the respondent insured against a mechanics lien on it. He procured a policy of
insurance for three months, insuring himself against loss occurring within three
months before the owner of the building could formally take it over. The owner
subsequently took it over, but the respondent continued to own his policy on the
building. The building was later destroyed by fire and the respondent claimed
under the policy. It was held that notwithstanding the fact that the respondent
had no liability to the owner after the building had been taken over he still had a
mechanic’s lien over the property by virtue of the contract and that as a
mechanic he had an insurable interest limited to the value of the property.
10
Section 12
11
Section 14(1)
24
In Stockdale vs. Dunlop (1840) 151 ER 391, (1840) 6 M & W 224, Harrison &
Company, owners of two ships, were expecting a load of palm oil from
overseas. The company orally agreed to sell two hundred (200) tons of the same
to Mr Stockdale, who insured the value of the palm oil he had purchased, plus
the profits he expected, with the respondents. One of the ships delivered one
hundred (100) but the other ship did not arrive having been lost in the high seas.
On the basis of the oral agreement between him and Harrison & Company, Mr
Stockdale claimed indemnity for the one hundred tons of palm oil that had not
been delivered. The insurer declined to pay arguing that Mr Stockdale had no
insurable interest in the subject matter and was therefore not entitled to
indemnity. It was held that Mr Stockdale had no interest in the palm oil since
there was no binding contract between him and Harrison & Company. What
existed between them was an agreement for the possibility of purchasing some
palm oil if and when the ships arrived safely. In the absence of a binding
contractual agreement there was no basis for Mr Stockdale to take out a policy
of insurance in the palm oil.

In Macaura vs. Northern Insurance Company Limited and others (1925) AC

619, the appellant was the owner of a timber estate while the respondents were
five insurers with whom he had effected insurance policies against fire on
timber within his estate. The appellant thereafter formed the Irish Canadian
Sawmills Company Limited and assigned to the company the whole timber
estate. The value of the timber was transferred as shares allotted to Macaura and
nominees. The greater part of the timber estate was later destroyed by fire, and
the appellant claimed against the five insurers under the policies taken
personally. The issue to be determined by the court was whether the appellant
had insurable interest in the timber subsequent to the formation of the company
to which he assigned the property in the timber. It was held that he did not have
insurable interest in the timber, either as a shareholder or creditor or bailee,
since the company was a different entity from him. He had no direct control of
the property since it belonged to the company and the company was not his
agent.

The decision in Macaura vs. Northern Insurance Company Limited and others
(1925) AC 619 has been overruled in subsequent cases. In Thomas vs.
Continental Creditors (1976) AC 346, it was observed that because a
shareholder has an interest in the company, with respect to the return of his
shares in the company, he has an insurable interest to the extent and value of his
hares in the company. Where, like in the case of Macaura vs. Northern
Insurance Company Limited and others (1925) AC 619, the value of the
property is equal to the shares held by one major shareholder it would be
ludicrous to disclaim the existence of insurable interest purely on the principle
that the company is its own person and it cannot be property of a shareholder.

25
A creditor can insure property belonging to a debtor. Indeed under section 14 of
the Marine Insurance Act, bottomrey interests are insurable. The rights of a
creditor in respect of his insurable interests were discussed in the case of Dalby
vs. Indian & London Life Assurance Company (1854) 15 CB 361, 139 ER 465.
With respect to life assurance, a creditor can take out a policy on the life of the
debtor, but to the extent of the debt. In Bromley vs. Washington Life Assurance
Company 122 KY 102; a person took out a life policy on the life of another on
the ground that he had advanced money to him. The policy was not limited in
value to the credit given, but to the whole life of the debtor. It was held that
under the circumstances a creditor’s interest in the life of the debtor is limited to
the value of the debt owed. In Grigsby vs. Russell (1911) 222 US 149, it was
held that a doctor’s interest in the life of his patient is limited to the value of the
fees owing by the patient to the doctor.

A bailee also has insurable interest over property that is in his control. In
Lucena vs. Craufurd (1806) 2 Bos & PNR 269, the plaintiffs were
commissioners assigned the take charge of all ships caught in the exercise of
conveying slaves anywhere in the high seas, as a result of the 1770 agreement to
stop slave trade the world over. While conveying some of the ships caught
trafficking slaves, the ships were totally destroyed in the high seas. The
plaintiffs, who had insured the ships, claimed for the value of both the ships and
the slaves on board. The issue was whether the plaintiffs, as bailees, had
insurable interest in the ships and the cargo. It was held that a bailee has an
insurable interest over the property in his possession and control since he stands
to account of his activities to his master. In Tomlinson (Hauliers) Limited vs.
Hepburn (1966), Tomlinson (Hauliers) Limited, who were carriers, claimed on
a policy taken out by them on cigarettes, the property of a third party. The
cigarettes were carried by Tomlinson (Hauliers) Limited in lorries hired out to
the third party to be taken to the third party’s warehouse in London. The lorries
arrived in London after working hours and were not immediately unloaded.
They were taken charge of by the third party’s night guard to be unloaded the
following morning and their contents checked. Without any negligence on the
part of the carriers the goods were stolen during the night. Tomlinson (Hauliers)
Limited claimed on the policy. It was held that Tomlinson (Hauliers) Limited as
a bailee had insurable interest in the goods and was entitled to recover under the
policy. The goods were still in transit as they had not been unloaded at the time
they were stolen.

As seen above, insurable interest in the life of another limited to actual value or
interest of the person taking out the policy. In Harse vs. Pearl Life Assurance
Co (1904) 1 KB 558, a son took out a policy on the life of his mother. It was
held that he had no insurable interest in his mother’s life, and if there was any it
was limited to the extent of funeral expenses. A similar holding was made in
Worthington vs. Curtis (1875) 1 Ch D 419, where a father had effected a policy
on the life of his son. In Satdev Sharma t/a Seema Driving School vs. Home
Insurance Company (NY) (1966) EA 8, the proprietor of a driving school, took
26
out a group life and accident policy on his own behalf and that of his
employees. During the period covered by the policy one of the instructors was
involved in an accident while travelling to Mombasa. He was seriously injured
and could not immediately resume his duties. The proprietor, as policyholder,
placed a claim for compensation for loss of services of the injured employee
and for damages for the injuries suffered by the employee. The insurer declined
to pay on the grounds that the policyholder did not have insurable interest in the
life of the employee. The court found in favour of the insurer on the basis that
the policyholder had taken out the policy in his capacity as employer. As such
he had no interest in the lives of his employees since insurable interest must be
a pecuniary interest measured by pecuniary loss that the person for whose
benefit insurance is effected is likely to sustain by reason of death or injury of
the insured life. It was stated that mere moral obligations of the insured are not
sufficient to sustain insurable interest.

Apparently, the decision in Satdev Sharma t/a Seema Driving School vs. Home
Insurance Company (NY) (1966) EA 8 is not good law. There were enough
authorities on insurable interest to justify a different holding. In Hebdon vs.
West (1863) 3 B & S 579, for example, it was stated that an employer has
insurable interest in the life of an employee if he can show that the employee is
of such quality as would his business in the event of the employee dying or
being incapacitated. In Shitling vs. Accidental Death Insurance Company
Limited (1857) it was said that an employee has an insurable interest in the life
of his employer if the employee can show that his employment is of such
specialisation as to be restrictive.

This doctrine establishes the proprietary or pecuniary interest of the insured in

the subject of insurance. It distinguishes the contract of insurance from a mere
wager or game of chance. Insurable interest by the insured makes it unimportant
or unnecessary for such insured to get rid of the subject matter of insurance. It
was observed in Bromley vs. Washington Life Assurance Company 122 KY 102
that the law does not allow one who does not have insurable interest in the life
of another to insure it for his own benefit for the reason that such cover would
be a mere wager and holds out great temptation for fraud and danger to the life
that the life is taken for.

Insurable interest also establishes locus standi or standing for a party to sue
under the policy of insurance and a ground for enforcing the contract of
insurance. In Oxford Union vs. Poor & Local Government Officers Mutual
Guarantee Association (1910) 103 LT 463 it was observed that any person who
sues on a policy of insurance can only sue in respect of his interest unless by
special provision the law allowing him the policy is meant for the sake of
another person or unless some statute says that the policy should insure for the
benefit of another.

27
The doctrine is one of the mechanisms that insurers use to ensure a fairly high
proportion of returns in form of profits in the business of insurance. It is tailored
in such a manner as to exclude all persons who may want to take out policies
over subject matter in which they have nothing to lose or where the so called
interest is not financial but emotional. Insurable interest is therefore used to
boost the returns of insurance by excluding frivolous claims that would put the
claimant in a better position than he would have been if he had not taken the
policy.

6. NON-DISCLOSURE

(a) Introduction

The doctrine concerns itself with what the parties must do in order to have
before them a valid contact. The doctrine is closely interrelated to the very
initial stages or steps that the parties must undertake via the proposal form
before they finalise a contract of insurance. The doctrine, often referred to as the
doctrine of utmost good faith or the doctrine of uberrimae fides, states that
parties to to an insurance contract unlike parties to ordinary contracts must
before they enter into a valid contract state or disclose all material facts in their
knowledge which touch on the materiality of the contract, because basically the
insurance contract is a speculated contract and without knowledge of the
material facts surrounding the subject matter o f insurance it may be difficult for
the parties to evaluate the extent of the risk and therefore the premiums to be
paid.

It dates back to 1766 when it was formulated by Lord Mansfield in the case of
Carter vs. Boehm (1766) 3 Burr 1905. He observed, “…Insurance is a contract
upon speculation. The special facts upon which the contingent chance is to be
computed lies in the knowledge of the insured only. The underwriter trusts the
representation of the insured and proceeds upon the confidence that he has not
concealed any circumstances in his knowledge to mislead the underwriter into
the belief that the circumstance does not exist. Good faith forbids either party by
concealing what he privately knows to draw the other party into a bargain from
his ignorance of that fact and his believing in that contract.”

These words were echoed in subsequent cases. In Joel vs. Law Union Crown
Insurance Company Limited (1908) 2 KB 863, Moulton LJ said “…in policies
of insurance, whether marine or life, there is an undertaking that the contract is
uberrimae fides, that is if you know any circumstances at all that may influence
the underwriter’s opinion as to the risk he is incurring and consequently as to
whether he will take it or what premium he would charge you will state what
you know. There is an obligation to state what you know and the concealment
of a circumstance known to you whether you thought it material or not avoids
the policy.”
28
In London General Omnibus Company Limited vs. Holloway (1912) 2 KB 72,
Lord Kennedy “… the person seeking to insure may fairly be presumed to know
all circumstances which materially affect the risk and generally is, as to some of
them, the only person who has the knowledge. The underwriter whom he asks
to take the risk cannot as a rule nor/and rarely has either the time or opportunity
to learn by enquiry circumstances which are or may be most material to the
formation of his judgement as to the acceptance or rejection of the risk and as to
the acceptance or rejection of the risk and as to the premium which he ought to
require.”

The courts insist that the parties to the insurance contract must be ready to
reveal all matters affecting the subject matter of insurance. Lord Chelsea in
London Assurance vs. Harsel (1879) 11 Ch D 363, summarised the notion of
uberrimae fides in the following words: “…in all categories of insurance the
question therefore must always be whether there was under all circumstances at
the time the policy was underwritten a fair representation or a concealment,
fraudulent if designed or although not designed burying materially the object of
the policy and changing the risk understood to be run.”

This doctrine contrasts with the doctrine of caveat emptor in ordinary contract.
A contract of insurance will not be enforced unless and until the doctrine is
made out.

(b) What Needs to be Disclosed

Parties to an insurance contract must disclose material facts touching on the

subject matter of insurance, which facts are either in the knowledge or ought to
be in the knowledge of the parties to the insurance contract. In Joel vs. Law
Union Crown Insurance Company Limited (1908) 2 KB 863, Moulton LJ
observed on what is to be disclosed: ‘…the duty is a duty to disclose and you
cannot disclose what you do not know. The obligation to disclose therefore
necessarily depends on the knowledge you possess.’

What the law requires to be disclosed falls in two basic situations: (a) the parties
must state what they know about the subject matter of insurance, whether the
party knew the particular fact considered material to the risk and if the party did
know then he ought to have disclosed the fact to the other party and (b) if he did
not know ought he to have known that particular fact, ought he to have had
constructive notice of the fact. Constructive notice is the function of what a man
in the position of the party in breach ought to have known so that if any other
person in the position of the party in breach ought to have known a particular
fact in respect of the subject matter it is irrelevant that the particular party did
not know.

29
Both parties may know the same fact or the fact sought to be disclosed is a
common fact between the parties or it is a notorious. The law takes the view that
a fact either in the knowledge of either party or ought to be in the knowledge of
either party because it is a notorious fact or a matter of public notoriety it ought
not be disclosed. The burden of showing that a fact was in the knowledge of
either party or of public notoriety is on the party in breach of the disclosure
requirement.

In Bates vs. Hewitt (1867) LR 2 QB 595 the issue came up for consideration.
During the 1860-64 US civil war a vessel Georgia had the notoriety of a
steamer in the service of the confederate states. In 1864 she was dismantled at
Liverpool, England, this being a fact of public notoriety. She was put up for sale
by public auction and was bought by the plaintiff who converted her into a
merchant vessel. In August 1864 the plaintiff through a broker effected with the
defendant insurance on the vessel for six months. The particulars furnished by
the plaintiff were that the steamer was chartered on a voyage from Liverpool to
Lisbon and subsequently to the Portuguese settlements on the west coast of
Africa and back. The vessel sailed from Liverpool and was captured by a frigate
from the US, on charges of having been used in the civil war. The plaintiff sued
the defendant claiming indemnity for the loss of the ship. The plaintiff had not
disclosed to the insurer, the defendant that the ship Georgia had been the
confederate cruiser and had been involved in the civil war. The insurer set up a
defence of material non-disclosure on that account, that is the concealment of
the fact that the vessel proposed for insurance was the late confederate war
steamer and was therefore liable for capture in the US or by US forces. The
insurer admitted that he had known at one time or other that Georgia was the
confederate cruiser involved in the war but that it was not present in his mind
when he undertook the risk. The plaintiff argued that the Georgia was a matter
of common notoriety and that since the insurer knew of this fact the plaintiff
was under no obligation to disclose it and therefore the defendant insurer ought
not be heard to disclaim liability on the basis of information that he knew or
ought to have known. It was held that the defendant was not aware that the
vessel he was insuring was the confederate cruiser, and although there was
information in the public domain about the vessel the defendant could not
realistically be expected to carry all sorts of miscellaneous information always
in his mind which information was not of importance to him at the time he got
it.

In London General Insurance Company vs. General Marine Underwriters

Association Limited (1920) 124 LT 67, the plaintiff insured on 24 th September
cargo on a vessel on a lost or not lost basis which was on a voyage from Italy to
England. On the evening of 24th September the vessel and cargo caught fire and
was reduced to a total loss. The burning of the vessel and cargo was posted on a
notice board at the Lloyds Underwriters of London on 25 th September at 10.00
am. At about 4.00 pm on 25th September the plaintiff effected a reinsurance
policy on the cargo on the defendant under a lost or not policy. Neither the
30
plaintiff nor the defendant knew of the risk having in fact attached at the time of
effecting the reinsurance policy. The plaintiff claimed for the loss under the
reinsurance policy, and the defendant rejected the claim contending that the
occurrence of the fire ought to have been disclosed to them and consequently
they were not liable. The plaintiff maintained that since the defendant ought to
have known in the course of their business the contents of the ships on the
notice board this was a circumstance that they were not bound to communicate.
It was held that the defendant was not deemed to know the contents of the ships
that at the time they received the information would have been of no interest to
them at all. The plaintiff’s claim failed. It was observed ‘it is said that if that
rule is true of the plaintiffs it is also true of the defendants, and they ought to
have known in the course of their business the contents of the ships on the
notice board. It was a circumstance that the plaintiffs were not bound to
communicate to them. One could not always expect the defendants to have
present in their mind information posted on notice boards which at the time
would not have been of any interest to them at all.’

It would appear that the burden to disclose lies more heavily on the insured than
on the insurer. They are apparently not bound to disclose a state of affairs of a
risk being undertaken which the insured is not aware of. In Sat Dev Sharma t/a
Seema Driving School vs. Home Insurance Company (NY) (1966) EA 8, the
proprietor of a driving school took out a policy on his own life and that of his
instructors. It turned out, on the injury of one of the instructors, that the
proprietor had no insurable interest on the instructor’s life. At the time of
underwriting the risk the insurer or ought to have known that the proprietor had
no insurable interest in the lives of the instructors and yet he proceeded with
underwriting the risk knowing well that there would be a disclaimer. It was held
that the insurer was not bound to disclose the law since ignorance of the law is
not a defence.

(c) The Determination of What ought top be Disclosed

The courts have devised what are referred to as tests of materiality in regard to
what the insured must level out in respect of the subject matter of insurance.
These tests relate to both the insurer and the insured.

(i) the test of the reasonable or prudent insurer

The test is concerned about what would influence an insurer in undertaking

particular risks. Under section 18(2) of the Marine Insurance Act, it is broadly
said that ‘a circumstance is material if it would influence the judgement of a
prudent or reasonable insurer in whether he will take the risk and in fixing the
premium.’ The courts have given effect to this provision and promulgated the
objective test of materiality. The test requires that the insurer ought to know
facts about the subject matter which a person in his circumstances would require
in order to make up their mind as to whether he will underwrite the risk or not,
31
and if he does so underwrite what consideration to charge under the
circumstances.

The modern form of the test was stated in the case of Associated Oil Carriers
Limited vs. Union Insurance Society of Canton Limited (1917) 2 KB 184. In the
matter, a German charter party requested the plaintiff to proceed to a port in
Romania on 31st July 1914 to freight certain goods. On the same day, without
disclosing to the insurers that the charterers were a German firm, the plaintiff
effected an insurance policy against war risks with the defendant company. The
ship started forthwith for Romania. On 6th August 1914 she arrived at Gibraltar
where consequent to the out break of the First World War on 4 th August 1914
she remained awaiting orders. On 11th August 1914 by orders of the plaintiff the
trip to Romania was abandoned and the ship ordered back to England. In her
way back she was completely destroyed. The insurers disclaimed liability under
the policy on the grounds of non-disclosure. The matter that was allegedly not
disclosed was the fact that the charter party was a German firm, which was
made illegal by the outbreak of the war. It was held that the fact that the charter
party was a German firm was on 31 st July 1914 material, but as at that date that
fact if disclosed would not in fact have influenced the judgement of a prudent
insurer and therefore was not material in the circumstances within the meaning
of section 18(2) of the Marine Insurance Act, so as to necessitate its disclosure.
The non-disclosure of the fact did not invalidate the insurance policy. Atkin LJ
said ‘I think that the standard of prudence argued for the insurer indicates an
insurer much too bright and good for human nature’s daily food, and there
seems to be no reason to impute on the insurer any higher degree of knowledge
and foresight than that reasonably possessed by more experienced and
intelligent insurers carrying on business in that market at that time…’ There was
no way in that market at that time that any insurer would have known that on 4 th
August 1914 that Germany would be an enemy of Britain, and therefore there
was no reason to imagine that such a disclosure would be necessary.

Whether or not a particular situation or facts will influence an insurer in taking

up a risk will depend not on his subjective view of the subject matter but on the
view of more experienced and intelligent insurers carrying on business in that
market at that time. Imperative conditions in the market at the particular time
must be assessed before it decided whether or not any particular insurer will be
influenced by those facts or not.

(ii) the test of the reasonable or prudent insured

Like the test of the prudent insurer, this test attempts to introduce into
consideration what the insured considers material. It is based on objective
evidence. It is not enough that a particular insured did or did not disclose a
particular matter or fact whether or not he considers it material or not, but
whether a reasonable person in the shoes of the insured would have considered

32
the particular fact or circumstance material and therefore likely to influence the
opinion of a prudent or reasonable insurer into underwriting the risk.

In Horne vs. Poland (1922) 2 QB 364, it was observed that ‘if a reasonable man
would know that the underwriters would be naturally interested in deciding
whether to accept the and at what premium, the fact that they were kept in
ignorance of it is fatal to the plaintiff’s claim. The plaintiff was with the
contract of insurance and if he failed to state what a reasonable man would
disclose he must suffer the same consequences as any other person who makes a
similar contract.’

In the instant case the insured was an alien who had born in Romania, but
immigrated to England at the age of twelve and lived the rest of his life there.
After twenty-two years in England he took out a policy of insurance in burglary.
When he claimed under the policy following a case of burglary, the insurer
disclaimed liability on the basis that the insured had failed to make a material
disclosure in respect of his birth and childhood, which is the fact that he was a
Romanian foreigner. It was held that the insured had made a material non-
disclosure; he did not state his nationality and his claim failed on that basis.

(d) The Rationalisation of Non-Disclosure

The courts have advanced various reasons for the presence of the doctrine.

(i) the contractual basis of non-disclosure

The doctrine is contractual in the sense that the information given in the
proposal form is normally subject to the ‘basis of the contract clause’, which is
normally contained in the declaration signed by the insured at the end of the
proposal form. Should it turn out that the information given is untrue or
misrepresents the true state of affairs then the insurers will not be liable. If the
statements made by the insured are true and present the true position the insurer
would be liable. The insurer would not be liable if the facts reveal a different
situation. The basis of the contract clause makes the doctrine binding.

(ii) the antique nature of the doctrine

The courts have alluded to the fact that the doctrine is an antiquity that binds
courts on the basis of precedent having been formulated as far back as 1966 by
Lord Mansfield in Carter vs. Boehm (1766) 3 Burr 1905. It is an old doctrine,
which invariably distinguishes the insurance contact from any other contract.
The principle laid in the case was that the facts about the insurance lie more
with the insured rather than the insured, therefore there must be a fair
representation by the insured if the insurance contract is to be respected.

33
In Carter vs. Boehm (1766) 3 Burr 1905, a policy was taken out in respect of a
fort called Marlborough in Sumatra. On a claim by the insured, governor of
Sumatra, the insurer disclaimed liability on the ground that there had been a
material non-disclosure in respect of information on the probability that fort had
certain weaknesses and those weaknesses opened it to attack by the French. In
respect of the alleged non-disclosure Lord Mansfield observed that the
underwriter knew that the insurance was for the governor, he knew that the
governor must have been acquainted with the state or condition of the fort, he
knew that the governor could not disclose the condition of the fort consistent
with his duties and he knew that the governor by insuring apprehended at least
the possibility of an attack. With this knowledge and without asking questions
he underwrote the risk. He could not therefore be heard later on to allege that
there was failure to disclose by the insured. The court found in favour of the
insured.

In Mayne vs. Walter (1887) Park Reports 220, the insured sought to recover
from the insurers in respect of some goods, called ‘super cargo’, which were
lost when the ship carrying them was captured by the French. The insurer
disclaimed liability arguing that the insured should have disclosed the fact there
was in force at the time a French ordinance providing that a ship could not carry
‘super cargo’ of a country at war with France. Lord Mansfield found in favour
of the insured. According to him if both parties were ignorant of the existence
of the new French law the underwriter had to ran all the risks and if he knew of
the edit it was his duty to inquire if such cargo was on board.

In its original form, the doctrine of non-disclosure was to the effect that an
insured person will say what he knows of the subject matter on the inquiry of
the insurer. If a policy of insurance were issued without the underwriter making
inquiries about the state of affairs of the subject matter he would not be heard at
a later stage to raise in defence the doctrine of non-disclosure. The formulation
by Lord Mansfield and the subsequent formulations in the 18 th and 19th centuries
are at variance. The latter formulations are represented by the remarks of Lord
Scrutton in Rozares vs. Bowen (1928) 32 Lloyds, where he said ‘it has been for
centuries in England the law in connection with insurance of all sorts that it is
the duty of the insured to make a full disclosure to the underwriter without
being asked of the material circumstances.’ It is clearly not accurate to say that
the doctrine applies on the basis of antiquity.

(iii) the insured has monopoly of information

Lord Mansfield laid this position as far back as 1766 in Carter vs. Boehm
(1766) 3 Burr 1905. As between the two parties the insured has a monopoly of
information. In all subsequent cases the courts have always stated that one of
the justifications for non-disclosure is that the insured has monopoly of
information concerning the subject matter of insurance. The courts in all these
cases appear to be saying that in all types of insurance the insured is but the
34
only person who, because of the control in terms of physical control of the
subject of insurance, who knows more about it and he must as a rule be required
to state all that he knows in order to enable the insurer to underwrite.

In Joel vs. Law Union and Crown Insurance Company Limited (1908) 2 KB
813, the policy was taken out on the life of the insured. The dispute was the
issue of non-disclosure – whether the insured knew of any circumstances in her
life that would have indicated that she had a history of mental derangement.
Truthfully she answered in the negative, but it turned out that previous to taking
the policy she had suffered from bouts of influenza and acute mania, which
were indicators of mental neurosis. Did she truthfully answer the question? Did
she know that suffering occasionally from influenza and acute mania were
indications of mental derangement? It would appear that she did not know, and
expecting her to have specialised knowledge of her illness was unreasonable.
Indeed, Moulton LJ was well aware of this when he said ‘not even the most
skilled doctor after the most prolonged scientific examination could answer the
question himself, and a layman can only give his honest opinion on it. But
policies of insurance issued by many insurance companies are framed so as to
invalidate the truth of such information and render what would really opinion
into statements of fact.’

In Bates vs. Hewitt (1867) LR 2 QB 595, it was alleged that the insured person
did not make a material disclosure in respect of the history of the ship. Did the
insured at the time he was seeking the policy know that the underwriter did not
remember that Georgia was the confederate cruiser? In Associated Oil Carriers
Limited vs. Union Insurance Society of Canton Limited (1917) 2 KB 184, was it
possible for the insured to know that soon there would an outbreak of the First
World War and therefore disclose the nationality of the charter? The answers to
these questions beg the answer to the question: why have the courts insisted that
it is the insured with monopoly of information?

Assuming in 1766 when Lord Mansfield formulated the doctrine the insured
truly had monopoly of information, does that remain the position to date given
the advances in technology that human has undergone? Is it true that when
taking out a policy on his life the insured is in monopoly of information about
his life as compared to the insurer? In any case all life policies proceed on the
basis of medical reports or records sponsored by the insurers, which records are
more authoritative than the information from the insured. Why should the
insurers disregard these records and instead rely more on the information from
the insured? In marine insurance it is possible for insurers to track ships
everywhere in the world. Is it possible for a charter who has no means of getting
information about the movement of the ships to have monopoly of information
on the ships? Why should the insurers and the courts insist that statements made
by the insured are more important than advancement of technology? Is it
factually true that the insured knows more about the subject of insurance than

35
the underwriter? Are there no situations where the underwriter might know
more of the subject matter than the insured person?

(iv) it seeks facts not the law

The doctrine is justified on the basis that it seeks facts and not the law. What
ought to be disclosed have nothing to do with the law. It has been argued that
what needs to be disclosed are facts and that the law need not be disclosed. All
the parties are assumed to know the law; hence the maxim ignorance of the law
is no defence. An insured should not be heard to say that he did not know a
particular legal situation in respect of the policy he sought to take out and if he
happened to be ignorant of the fact the insurer should not be held responsible
for such ignorance.

In Sat Dev Sharma t/a Seema Driving School vs. Home Insurance Company
(NY) (1966) EA 8, Farrell J implied that the insurer because of the nature of the
insurance business knew that if a person took out a policy of insurance where
there was no insurable interest the insurer would not pay under the policy. The
insurer knew the law and took advantage of it. The fact that the insured was
ignorant of the law was clearly not the insurer’s business. The court stated that
the insurer having received monies from the insured knowing that that was one
of the situations when they could not pay on account of absence of insurable
interest they should consider themselves under some moral obligation to pay on
an ex-gratia basis.

However, how does one safely define what is law and what is fact? The
assertion that the doctrine of non-disclosure seeks facts not law misses the
point, since the law takes into account all the circumstances or facts in a given
case it is merely to stretch too far the expectations from the insured. There is no
reason if the doctrine is one of equity for the insured in one situation to be
denied information that is of importance to him because it is the law and in
another situation to be information is required of him because it is a fact. If the
proprietor of the driving school in Sat Dev Sharma t/a Seema Driving School vs.
Home Insurance Company (NY) (1966) EA 8, knew that taking out a policy of
insurance on the life of his instructors was one of the situations where the policy
would not have insurable interest and risk would not attach then he would not
have taken out the policy.

The distinction between the facts and the law is brought up for some other
reason or purpose. Because the insurer deals on a daily basis with these matters
he is bound to know much more than a layman. It is unfair that the knowledge
the insurer has accumulated cannot be disclosed to the other party.

(v) it avoids the floodgates of exploitation

36
If it is permitted that policies are to be taken out without a full disclosure of the
circumstances that touch on the risk one would open floodgates of the
exploitation of the insurer by the insured, as it would encourage suppression of
information by the intending insured.

Lord Mansfield himself touched on this when he noted that the reason for the
rule that obliges parties to disclose is to prevent fraud and to encourage good
faith. In a subsequent case, Lindenau vs. Desborough (1828) 8 B & C 586, it
was observed that in all cases of insurance the underwriter should be informed
of every material circumstance within the knowledge of the insured. The
contrary doctrine would lead to the frequent suppression of information and
would often be extremely difficult to show that the party neglecting to give
information thought it material.

The question that one is tempted to ask is whether insurance is so exceptional.

What is it in it that makes it to be treated differently from other fields of
commerce?

(e) Attempts at Reform

One of the problems or hardship about the doctrine of non-disclosure is the

imbalance in the information sought between the insured and the insurer. The
doctrine as practised today puts too much or expects too much information on
the part of the insured without necessarily stating with any amount of caution
the limits of the information sought. Attempts have been made towards
reforming the doctrine. There are three basic approaches to the reform of the
doctrine.

(i) reducing the subjectiveness of the doctrine

This approach merely attempts to reduce the incidence of subjectiveness of the

information sought from the insured person. It accepts that the doctrine as
enunciated in Carter vs. Boehm (1766) 3 Burr 1905, that there must be material
disclosure by the insured of facts that touch on the nature and extent of risk
being underwritten, but the materiality should not be determined by the insurer
or any other external operatives to the contract. The party from whom the
information is sought should determine the materiality. This approach basically
follows the approach in Bates vs. Hewitt (1867) LR 2 QB 595, where it was
stated that the question must always be whether there was under all
circumstances at the time the policy was underwritten a fair representation or a
concealment. This ideally touches on the state of mind of the proposer, and the
extent to which he has deliberately concealed or misrepresented facts, as he
knows them.

In adjudging the materiality of the facts to be disclosed in any given situation,

distinction must be made between what the insurer thinks is material and what
37
the insured or proposer would think is material. It would be manifestly unfair to
bring the experience of the insurers and impose it on the insured who may only
be making a proposal once in their lifetime and not fed with the goings on in the
market. This approach requires that what will be disclosed or ought to be
disclosed is or are facts that are either known or ought to be known by an
average or reasonable person in the position of the proposer taking into account
the general circumstances in the market.

Law reform founded on this approach has been effected in England, Australia
and New Zealand, but not yet in Kenya.

(ii) abolition of the doctrine

The other approach is to seek the abolition of the doctrine altogether. The
argument here is that the doctrine is unfair in so far as it seeks to hold monopoly
of information on the insured. It is also said that there is absolutely no sense in
treating the insurance contract as a special contract where in fact the ordinary
doctrine of contract, such as caveat emptor, cannot apply. This approach has
been adopted in Kenya to a little extent through the amendments effected the
Insurance Act in 1984. The relevant provisions in this respect are sections 80
and 81 of the Insurance Act.

Section 80 deals with forms of the proposal for insurance or other material used
by the insurer. The provision attempts to shift the whole burden of disclosure to
the insurer. It takes into account the fact that the insurance contract is an
adhesive contract, where the proposer must take it whole as framed by the
insurer or leave it. If there are any misrepresentations or inaccuracies by way of
questions seeking information, then the burden should properly fall on the
insurer rather than on the insured. Under section 80(2)(3), the Commissioner of
Insurance has power to correct any inaccuracies or misrepresentations which
may appear in the proposal forms being used by the insurers in the Kenyan
market.

Section 81(2) it is provided that notwithstanding anything contained in the

contract of life insurance a policy is not to be avoided by reason only of an
incorrect statement made by the insured. The fact of a misstatement or
inaccuracy does not per se affect the validity of the contract. In order for the
mistake of fact to invalidate a contract of life insurance it must be shown by the
insurer that that statement was material to the risk. The effect of this provision
is completely shift the burden to the insurer and its up to the insurer to show that
the statement they are complaining about was in fact material in the sense that it
misrepresents or undermines the level of risk which been underwritten.

There are conditions that must be met before the insurer can rely on the
misstatement to avoid the contract. The insurer might show that the statement
was made in the knowledge that it was untrue or with no reasonable belief that
38
it was true. It should also be shown that a period of three years have not passed
since the statement was communicated to the insurer. The insurer cannot
complain about the statement upon the lapse of three since it was communicated
to them. Where the statement complained of is one that was filled in the
proposal form by an insurance agent rather than the proposer himself, the
burden of proof will lie on the insurer to show that in fact the untrue statement
is one of the proposer and not the insurer. This provision has had the effect of
substantially amending the common law position with regard to the agent in
insurance law.

(iii) the rateable approach

The approach acknowledges that the doctrine still serves a useful purpose, but
the form in which it is practised is unfair and inequitable, and it must therefore
be made amenable to equities. It holds that instead of the non-disclosure
doctrine being used as a total bar to a claim of insurance a proper rate of the
claim should be allowed by the insurer in every situation where an allegation of
misrepresentation or disclosure is made. The extent to which non-disclosure has
affected the risk should be worked out to determine what proportion of the risk
can be made from the premiums received.

In Kenya this approach has expression in section 86 of the Insurance Act, which
touches on misstatements. A policy of life insurance is not to be avoided by
reason only of misstatement of the age of the life insured. The mere fact of
misstatement of age does not vitiate the contract. Under section 86(2) where
there is a misstatement as to age, the insurer may vary the sum assured by the
proportion of the misstatement of age over the total sum payable under the
policy.

7. INDEMNITY

When a person takes out a policy of insurance his intention is to be indemnified

in the event of loss or the occurrence of the event insured against. It is the
intention of the insured or assured that they do not benefit or profit from the
contract of insurance and therefore they should not gain more than they had
before the policy of insurance was entered into. Because of this the evolution of
insurance has produced in-built mechanisms to make sure that the insurer who
is a businessman can manage on going viable concern level the industry of
insurance and the insured does not overlook the profit by merely taking a policy
of insurance.

The doctrine or principle of indemnity provides that all that the insurer is under
an obligation to do in the event of the risk attaching is to put the insured in the
position as far as money can do it as he was immediately before the loss took
place. Indemnity expects no more or less than mere restitutio in integrum. The
39
loss, which the insured has suffered, is replaced or the insured is put in the
status quo ante the loss occurred. The doctrine is central in nearly all categories
of insurance, save in policies that normally have a fixed value (valued policies)
or non-indemnity policies such are common in life insurance. Whenever
therefore a loss has occurred the insurer will be interested in discovering any
circumstances that may diminish or reduce or extinguish the same which
circumstance or event must be taken into account in determining what is
recoverable by the insured.

According to Lord Blackburn in Durnard vs. Radicanachi (1882) 7 App. Cas.

333: ‘the general rule of law is that where there is a contract of indemnity and a
loss occurs anything which reduces or diminishes or even extinguishes that loss
or the amount the indemnifier is bound to take. If after a risk has attached there
is a third party liability to be paid to the insured, the insured must make good
that claim to the insurer or pass to the insurer such rights as may accrue to the
insured. This is so whether or not the right of paying under the third party
liability is legally founded or merely a gift voluntarily paid to the insured to
assist him in personam.’

Indemnity must be accounted for in respect of third party liability in (a)

payments in respect of contractual obligations, (b) payments in respect of
tortuous liability and (c) payments in respect of gifts that may accrue from third
parties. In all three the receipt of third party liability would be tantamount to
double indemnity and therefore inequitable.

In Darrel vs. Tibbitts (1880) 5 QBD 560, money was paid under a fire policy to
a landlord in respect of a fire had been caused by a tenant in the house. The
landlord thereafter sued the tenant for liability under the tenancy for wilfully or
negligently causing the fire that damaged his property. It was held by Lord Brett
that where after payment by insurers the insured received compensation for his
loss from other sources the insurer will be entitled to recover from him any sum
received by him in excess of the loss actually suffered by him. If the insurer
cannot recover the excess payment from the insured it would mean that the
insured would have the whole extent of his loss as to make good by the tenant
and would also have the whole amount paid by the insurer. If that is so then the
whole doctrine of indemnity will be done away with. The landlord would not be
merely indemnified; he would be paid twice over.

Other principles associated with indemnity that ensure that the insured does not
get more than mere indemnity include: subrogation, salvage, contribution and
apportionment, and reinstatement. These four are often called twin doctrines of
indemnity. They make sure that in any given situation the insured does not
come out of the contract of insurance richer than when he came in.

40
The basis of the doctrine of indemnity is difficult to find. Many courts have
alluded to the notion of equity as the foundation of the doctrine. That is to say
that to allow the insured person to receive both indemnity and any other benefit
accruing from third parties would be to allow unjust enrichment or double
indemnity. This would be inequitable because it would be unfair to the insurer
that he should be called upon to pay to the insured after he has in actual reality
not suffered any loss on account of third party receipts. In order to avoid such a
situation the rule insists on a full account of all moneys received by the insured
after the insurer has paid him.

The insurer’s claim of any excess benefit to the insured has been justified on
four grounds. (a) The right of the insurer to all receipts in respect of indemnity
depend on the doctrine of subrogation which confers on the insurer the right to
receive all advantage of any residual remedy which the insured would have
been entitled to but for the claim of indemnity from the insurer. (b) The right of
the insurer is dependent on implied contract that is the insured holds for the
benefit of the insurer anything they may receive after the insurer has paid
indemnity. (c) The right of the insurer is dependent on a promise on the part of
the insured implied from the payment by the insurer of the amount of loss to the
effect that if the loss is afterwards made from other sources the insured should
pay back to the insurers what you received. (d) The right of the insurer to
receive reimbursement depends on the fact that insurers make their payment on
condition that the insured sustained a loss for which he claims indemnity. If
therefore the loss is made from other sources it is only fair and equitable that the
insurer receives anything in excess of that loss.

Is the doctrine justified?

In Stearns vs. Village Main Reef Gold Mining Company Limited (1962) 2 QB
330, (1961) 1 WLR 1043, gold commandeered by the government of South
Africa was returned to the owners. In the meantime payment had also been
made on a policy, which had insured the gold against all risks. The issue was
whether the owner could benefit from both the policy monies and the gold. It
was held that that would amount to double indemnity and the owner ought to
return the money or surrender the gold to the insurer. In Castellain vs. Preston
(1883) 11 QBD 380, the insurer paid money under a fire policy on a house.
Subsequently the owner of the house sold the house alongside the adjoining
estate. The issue was whether the owner could keep both the indemnity paid and
the receipt from the sale. It was held that he could not since the same would
amount to double indemnity.

In order to give effect to the doctrine of indemnity the industry has devised
other doctrines, which ensure that the insured does not anything else over and
above indemnity. The other doctrines are subrogation, salvage, reinstatement,
contribution and apportionment.

41
Subrogation

(a) The Principles

By virtue of the payment to the insured of indemnity monies the insurer or

underwriter becomes entitled to be placed in the position or to wear the shoes of
the insured and to succeed the insured in respect of all rights and remedies that
such insured would have been entitled to. Once the insurer has paid indemnity
under an insurance contract he is entitled to such rights and remedies.

Like indemnity, this doctrine is explained on the basis of equity that if a person
is paid in respect of a contractual obligation and that person subsequently
receives another payment by another person, whether a third party or tortfeaser,
and the receipt of the money reduces his liability equity demands that the
indemnifier should be paid or reimbursed by the contractee. To allow the
contractee to benefit would be contrary to the intended purpose of contract and
manifestly unjust.

This formulation of equity was stated by Lord Blackburn in Durnard vs.

Radicanachi (1882) 7 App. Cas. 333, ‘if the indemnifier has already paid then
anything which diminishes the loss comes into the hands of the person to whom
it has been paid it comes in equity that the person who has already paid the full
indemnity is entitled to be recouped by the person having received the money.
In this way the doctrine of subrogation makes sure that no more than indemnity
is actually received by the insured’.

In modern terms the doctrine of subrogation has been justified on the basis that
to allow an insured person to get more than indemnity by taking over third party
rights in respect of which money has already been paid under the contract
would be to the insured to take out policies with the expectation of enrichment
rather than securing proprietary interests in the subject insured. In this way
insurance would no longer be a mechanism for shifting and distributing risks
but rather an instrument for profiteering on the part of the insured.

In Castellain vs. Preston (1883) 11 QBD 380 the appellant was an insurer who
was claiming moneys paid under a contract of sale on a house which had been
burned and fully indemnified, but nevertheless sold at its market value with the
adjoining estate on which it was standing. The insurer’s argued that to allow the
insured to pocket the money and the receipts under the contact of sale would be
to allow double indemnity which would be unfair to the insurer. The insurer was
in effect saying that the insured had not in fact suffered any loss since he had
sold the house at its market value notwithstanding it having been burned. It was
held that the insured was not entitled to take both the indemnity and the sale
proceeds. According to Lord Brett the underwriter subrogates or steps into
rights of the insured. So far as the court is concerned as between the insured and

42
the insurer it is fair that the underwriter benefits from any windfall that may
accrue to the insured after such contract has been performed.

The question that naturally arises is: if it is unjust and inequitable for the insured
to benefit from indemnity, is the same not true of the insurer to benefit from
non-payment of indemnity? There is really no justification for the insurer to
benefit from the principle than the insured. Indeed the insured has a stronger
interest or title, by reason of the premiums paid, than the insurer.

In Yorkshire Insurance Company Limited vs. Nisbet Shipping Company Limited

(1962) 2 QB 330, (1961) 2 WLR 1043, the respondents had insured a ship
which about 1945 collided with a Canadian government vessel and became a
total loss. The value of the ship, which was indemnified by the insurer, was 72,
000.00 sterling pounds. Between the time of collision and 1958 when the
payment was made the sterling pound was devalued in Canada with the effect
that the accrual sum payable by the Canadian government was 127, 000.00
sterling pounds. The difference between the indemnity money paid by the
insurer and the reimbursement of the loss by the Canadian government was the
basis of a claim by the insurer as money that was received for and on their
behalf. The ship owners upon receipt of the Canadian government payment
quickly proposed to pay back the indemnity money in order to keep the larger
sum arguing that it was the owner of the ship who was entitled to benefit from
the devaluation rather than the insurer. The issue was who was entitled to
benefit from the windfall of 55,000.00 sterling pounds difference between the
indemnity paid in 1945 by the insurer and the reimbursement paid by the
Canadian government in 1958. The court found in favour of the insured.
According to Lord Diplock the insurer’s rights in the matter were limited to
recovering from the insured the amount overpaid, that is to say 72, 000.00
sterling pounds. The insurer was entitled to no more since the principle of
subrogation was a symbol which renders irrelevant the consideration of the
particular circumstances which enable the insured to recover from any third
party a sum which is in excess of the actual value of the subject matter. In the
opinion of the judge the insurer cannot under the principle of subrogation get
anything more than he himself paid under the principle of indemnity.

In Rehemtulla & Premji vs. Bishensingh 14 KLR 91, the plaintiffs were
merchants in Mombasa, who entered into a contract to convey gods by motor
lorry from Mombasa to Mbale. The plaintiffs insured the goods against transit
risks. When the lorry got to Nakuru it became necessary to refill the lorry with
petrol. While the process of refuelling was going on, which was being done
with the aid of a hurricane lamp, the lorry caught fire and both the lorry and the
petrol were destroyed. The plaintiffs claimed for the value of the goods under
the insurance contract and were paid the full indemnity for the goods. In the
meantime they also sued the transporters, the defendant, for negligence, who
were found guilty or liable for payment of a sum equal which was equal to the
indemnity paid by the insurer. The insurer claimed for reimbursement arguing
43
that the plaintiffs were not entitled to receive both the indemnity paid and the
accrual sum under the negligence suit. In outlining the doctrine of subrogation
the court held (a) that the plaintiffs were entitled to sue for negligence against
the unjustified loss of their goods notwithstanding the indemnity paid by the
insurer, (b) that the insurer was entitled to subrogation in this category of
insurance as they do in marine policies (under the subrogation the insurer is
entitled to succeed to all rights, ways and means by which the insured was
protected against or to reimburse him of any money received) and (c) that to
recover the reimbursement of the insured the insurer had no direct right to a
cause of action against third parties, he must sue in the name of the insured or
wait until the insured had taken steps to remedy the wrongdoing then claim
from them, and the insured must avail their name if and when there is a third
party right that the insurer wishes to prosecute.12

(b) Duties of the Insured in Respect of Subrogation

Since the rights of insurers are those of the insured and the insurer merely steps
into them, the insured has several obligations to facilitate the taking over such
rights and remedies.

Firstly, the insured must give assistance to the insurer in all ways to assist him
place a claim against third parties. He must avail all forms of information
touching the circumstances under which the wrongdoing was carried out.
Failure to do this may lead to an action where he can be compelled to give such
information. Secondly, the insured must not prejudice in any way the rights or
position of the insurer. The insured has an obligation to protect the rights and
interests of the insurer (a) by not enforcing any right accruing to him without so
informing the insure and (b) by not releasing third parties from any liabilities
arising out of the loss. Any purported release of a third party of his obligation
will place the insured directly under an obligation to compensate the insurer.
Insurers can directly sue the insured if the insured has foreclosed the right of the
insurer under the contract of insurance.13The insured is not to enter into any
agreement, which concedes or disclaims liability. He is not supposed to
determine whether he is liable or not.

(c) Effects of the Doctrine

After payment of indemnity the insurer steps into all rights and remedies of the
insured to the extent of the actual indemnifier and by so doing ensures that the
insured does not come out of the insurance contract richer or poorer than he was
before entering the contract of insurance. The effect of the doctrine of
subrogation is to reduce the incidence of unjust enrichment by the insured in
situations where the insured is entitled to any third party remedy. If however the

12
John Kakonge vs. Oriental Fire General Insurance Company Limited (1965) EA 137 and Scottish Union and
National Insurance Company Limited vs. Davies (19700 1 Lloyds Reports 1.
13
Boag vs. Standard Marine Insurance Company Limited (1937) 2 KB 113.
44
insured is for some reason under-insured the effect of the doctrine is to put
responsibility onto him without passing the burden to the insurer. In so doing it
is hoped that the insured will but take out policies covering only their
proprietary interests in the subject.14

Reinstatement

Because of the need to ensure that only indemnity is paid and further because of
the situation where damage to the subject matter is not always full to the extent
that the insured person is given opportunity to receive nothing but indemnity, it
becomes necessary that where the subject matter of insurance is only partially
destroyed the insured may wish to retain such subject matter. Selection either to
receive indemnity or replace or repair the partially destroyed subject matter is
exercisable by the insured. Where the insured would rather retain the partially
damaged subject matter he may on information cause the insurer to set in
motion the process of reinstatement rather than pay indemnity.

Reinstatement is said to be merely the replacement or repair of the subject of

insurance putting it in the condition in which it was before the risk attached.
Reinstatement normally can take place in categories of insurance that have as
their subject matter some physical and tangible elements that can be replaced or
repaired.

The effect of economic reinstatement is basically to allow the insurer to reduce

his costs by the replacement or repair in situations where it would be more
beneficial to him to replace or repair rather than payment of a full indemnity.
This is only possible where there is a partial loss or a constructive total loss. 15
Where the subject of insurance is wholly destroyed it is unreasonable if not
impossible to undertake reinstatement.

Reinstatement is normally in contractual terms and is subject to an option by the

insurers. This because under all indemnity insurances the underwriter
undertakes to indemnify the insured for the loss. In most property insurances the
insured will invariably find contractual terms specifying for reinstatement by
the insurer as an alternative to payment of indemnity. 16Because there is need to
opt for either payment of indemnity or reinstatement it is normally necessary
that the insured person make the option within some time stipulation. Where a
risk has attached the option has to be exercised by the insured, and he must be
given reasonable time.

In Kenya the option must be exercised within 21 days of the risking attaching.
This is important in order to give the insurer time and opportunity to assess the
extent and circumstances of the loss before payment is undertaken. It is during

14
Commercial Union Insurance Company vs. Lister (1874) 9 App. Cas. 403.
15
Constructive total loss is not total but consequences make it total.
16
Anderson vs. Commercial Union Insurance Company Limited (1885) 55 QB 146.
45
this time that the option is exercised and that insurers appoint loss adjusters or
valuers to ascertain the extent and circumstances of the loss. Whereas the
insured is expected to select between the two remedies, the selection is not
conclusive. The insured may if he thinks the insurers option is unreasonable or
unwarranted request that the other mode of payment is the more reasonable and
therefore beneficial to the insured.

In Sutherland vs. Sun Fire Insurance Office (1852) LR 775, it was observed that
although the insured has the first option to say whether he would receive
indemnity or reinstatement this option is not wholly binding on the insurer. The
insurer on receiving evidence of loss and assessing the extent and circumstances
of the loss may determine which of the options is the more reasonable. It is only
after this that the insurer can determine how he wants to exercise or make their
payment to the insured whether the payment will be in the form of indemnity or
reinstatement. In Kenya the insurer exercises the option.

After the insurer has set in motion the process of ascertaining the extent of loss,
he should inform the insured whether the loss sustained will be paid one way or
the other. In practice reinstatement is the proper option if and when the loss
sustained is equal to half the value of the subject matter. At this level of loss,
insurers call it an economic value to reinstatement. It would be more
economically sensible to replace or repair if the damage or accounts to half the
value of the subject matter. Anything over or above one half is considered in
insurance terms to be a total loss, and therefore the more reasonable option
would be to pay indemnity.

Once a decision has been made to reinstate rather than pay indemnity the
insurer is under an obligation to discharge that option satisfactorily.
Reinstatement must be undertaken to the satisfaction of the insured and
technically meet the condition of the subject matter before the risk took place.
The insurer will not be heard to raise issue about the adequacy of reinstatement
if or after the option has been made. Once the insurer opts to reinstate he must
meet all the costs even where it turns uneconomical.17

In Brown vs. Royal Insurance Company (1859) 1 E & E 853, it was observed
that ‘insurers are bound by their election and if their performance has become
impossible or more costly than anticipated they must perform their contract or
pay for non-performance’ once election is made the insurer is bound to see to it
that the subject is put back to its condition before the risk attached. 18

Salvage

17
Anderson vs. Commercial Union Insurance Company Limited (1885) 55 QB 146
18
John Kakonge vs. Oriental Fire General Insurance Company Limited (1965) EA 137 and Scottish Union and
National Insurance Company Limited vs. Davies (19700 1 Lloyds Reports 1.

46
This is concerned about the physical remains of the subject matter. The question
here is normally what happens to the salvage or physical remains of the subject
of insurance after full indemnity has been paid?

Salvage merely states that where the subject matter is either a constructive total
loss or a total loss and where the insurer has opted to pay full indemnity rather
than reinstatement the insured must give up any claim to the remainder of the
subject matter or in receiving the indemnity account must be taken of the value
of the physical remains. The physical remains always has some economic or
financial value notwithstanding the damage that has been occasioned to it.
Salvage therefore refers to the physical acquisition by the insurer of the remains
of the subject of insurance after the risk has attached.

It recognises that where a risk has attached or the peril occasioned, the loss is
never absolute but rather only constructive and that notwithstanding the damage
the remains may be put to some use or may still have some value. Like
indemnity salvage has its origin in equity and case law insists that to allow an
insured to receive both full indemnity and the subject of insurance would be
inequitable as unjust enrichment and therefore unnecessary.

When and if the insured has opted both to retain the salvage and receive mere
indemnity he must inform the insurer alongside furnishing his proofs of the
circumstances of the loss it is only after such option that the insurer may make
his final payment under the contract. The procedure of payment and salvage is
set out in sections 60 to 65 of the Marine Insurance Act. Under section 60 the
insured is bound by his option, and once gives notice of his option the same is
irreversible.

The effect of salvage is that it considerably reduces the cost that an insurer may
incur in any given contract of insurance. Its main effect is to enhance the level
of profitability by the insurer insisting either that the physical remains are
abandoned to him or that the accrual indemnity payable takes account of the
value of the salvage. This principle ignores the fact that in entering into a
contract of insurance the insured does not seek or purport to pass title under any
circumstances but rather to receive a money equivalent if and when the risk
insured against attaches. It does not account for the premiums that the insured
pays in undertaking the contract of insurance.

Apportionment and Contribution

These twin principles make it certain that the insured does not come off the
contract richer or poorer than he entered it. They operate where either the
insured has over insured or there is double insurance. The concern here is to try
and relate the proprietary interests of the insured to the premiums that have been
paid by the insured. The object is to make sure that the insured does not receive
more value than he actually holds in the subject matter by having the insurers
47
apportion and contribute to the loss on a pro rata basis to the actual value
represented by the loss in the subject of insurance.

In Scottish Union and National Insurance Company Limited vs. Davies (19700
1 Lloyds Reports 1, it was observed that ‘the principle of contribution depends
on the doctrine not of law only but of common sense that a man who insures his
interest in property against loss whether that interest is that of a proprietor or of
a creditor cannot recover from an insurer a greater amount than he has lost by
the contingency insured against. So in the case of double insurance of the same
interest with different insurance companies the insured will be entitled to
recover no more that the full indemnity or full amount of the loss which he has
suffered.’

Where the insured has taken out more than one policy over the same subject
matter with effect that he has over insured the insurers apportion the liability
and contribute to the liability actually sustained on a pro rata basis with the
result that the insured will lose the premiums which are not represented by a
proprietary value in the subject matter of insurance. 19Like indemnity these two
are based on the notion of equity. It was observed in Godin vs. London
Assurance Company (1883) LR, (1758) 1 Burr 489, that ‘if the insured is to
receive but one satisfaction natural justice demands that the several insurers
shall all of them contribute pro rata to satisfy that loss against which they have
al insured.’

Before any insurer can plead contribution several prerequisites must be present:
(a) contribution can only be made in respect of the same subject matter (double
insurance), (b) all the policies must seek to cover the same interest, (c) the
insured in all the policies must be the same person seeking to secure the same
interest, (d) the policies must be in force at the same time and (e) they must all
be legally enforceable.

The effect of these two principles is to give benefit to the insurer as against the
insured by insisting hat the insured must not get anything but indemnity.

8. CONSTRUCTION OF INSURANCE CONTRACTS OR POLICIES

Construction deals with the interpretation of policy of insurance. It seeks to

attain two considerations: (a) consistency and uniformity and (b) to give the
ordinary common man approach to the words and clauses as used in the contract
of insurance.

Several rules are used. It was suggested in Glen vs. Lewis (1853) 8 Ex. 607, that
judicial precedence may apply where ‘a construction has already been given or
put on a prose or phrase precisely similar to any in previously decided cases.’
The courts however refuse to apply judicial precedence in situations where
19
See sections 32 and 80 of the Marine Insurance Act.
48
dealing with construction that is similar to what is before them. Although the
courts should strive to follow a similar process, the words of Lord Atkin in Re
Calf and Sun Insurance Office (1920) 2 KB 366 must always be remembered,
where he said ‘on a question of construction one clause should not be used as
authority in another case unless the language and circumstances are
substantially the same or identical.’

The courts have evolved several rules to help them in the interpretation of
policies. These may be summarised into six broad rules.

(a) The Ordinary or Natural Meaning Rule

When construing words, clauses or phrases the ordinary and natural meaning or
sense of the same should be adopted, words must be used as ordinarily used by
ordinary people within the community within which construction is sought to be
used. Technical meanings can only be given effect to construe a word or phrase
or clause if it will amplify the ordinary sense in which a word or phrase or
clause is understood within the community.

(b) The Ejusdem Generis Rule

Words must be interpreted within the same genus or species as those

specifically mentioned. In situations where policy is not exhaustive in
enumerating factual situations only facts of similar effect can be interpreted
together. In Rein vs. Accidental Insurance Company (1892) 66 LT 401, the
policy stated that household effects were insurable. Among the things
specifically mentioned or enumerated were jewellery, watches, field glasses,
cameras, etc. Rein insured and lost a fur coat. The issue was whether the fur
coat could be said to be in the same class or genus as the enumerated items. It
was held that from the nature of the list the fur coat could not be ejusdem
generis to the items listed.

In Main vs. Railway Passengers Assurance Company Limited (1877) 37 LT

356, the insured was excepted in a life policy from playing in situations where
he would expose himself to danger. The listed dangerous games included horse
riding, racing of any type and steeplechase. The insured man died when he
accosted a woman in the street and was knocked down by the man
accompanying her. The insurer declined to pay under the policy on the grounds
that the insured had wilfully exposed himself to danger as stated under the
policy. Looking at the excepted circumstances the court found the cause of the
insured’s death did not fall in the same species as those listed in the policy.

(c) Policies must be Construed as a Whole

49
When interpreting an insurance policy the whole document must be given
effect. Interpretation should not be limited or confined to a particular word or
phrase or clause. All words, clause, phrases and clauses must be interpreted
together and no words, phrases or clauses must be rendered meaningless
without good cause. As a general rule effort must made to construe the policy so
as to give it the some meaning or to make the policy a positive document.

(d) Where there are Conflicting Clauses

The courts must strive to reconcile the intentions of the parties. The
reconciliation normally must take priority, but where it is impossible for the
court to reconcile the intentions as evidenced by the terms of the policy it has
must apply any other two available tests. It must construe the policy against the
insurer if the terms are such that different meanings are to be attached to the
clauses within the policy. This is called the contra preferendum rule. Because
the contract of insurance is basically standard form coming from the insurer he
should not have benefit of his mistake or confusion. He should be taken
responsible for the terms he has drawn. Where in the contract some terms are
typewritten, printed and handwritten, the greatest effect should be given to the
typewritten and handwritten words other than the printed words. Typewritten
and handwritten words are usually inserted into printed contract and they are
therefore likely to have been negotiated.

(e) No Parole Evidence Rule

Where the contract has been reduced to writing no oral evidence should be
introduced to vary or in any way change or explain the written policy or
instrument or alter the meaning of words or amend, extend or reduce the written
contract. Oral evidence may only be adduced to show the surrounding
circumstances in which the contract is made in order to explain the broad
background and intention of the parties. Oral evidence can only be introduced
where there is latent ambiguity, which is ambiguity that is within the
background of the contract. It cannot be introduced to vary or alter a patent
ambiguity, which is meant to further the intention of the parties.

(f) Trade Customs and Usages

In rare circumstances customs of trade and usages may be adduced to explain

doubtful words, phrases and clauses but which customs and usages cannot be
adduced to contradict the plain meaning of the terms. Customs and usages
invariably form the backbone of any business and must therefore be used as a
basis to show the circumstances under which the contract is entered into, but
cannot be adduced to vary the ordinary meaning which may be given to clear
statements of intention. In a variety of cases the courts invite practitioners as
amicus curie, persons who have attained some authority in the particular trade
50
to state the operational rules that may not have been given cognisance by the
courts of law.

These rules are referred to as rules of construction and generally apply in many
other fields.

9. THIRD PARTY MOTOR INSURANCE

Introduction

The development of this system is traceable to the invention of the engine,

which led to the use of motor vehicles. This had a lot of effects on people in
several respects. In the first place it led to improvement in the transportation of
goods and people, hence enhancing trade between places. On the hand it led to
accidents causing to damage to and loss of life and property.

After 1914 a big drop in industrial production in Britain caused by the First
World War was followed by widespread unemployment and poverty. Even the
poor who could not afford to compensate the third parties injured in car
accidents used cars. The poverty led to people pressing for a lot of legislation to
solve problems. The legislation mainly dealt with unemployment. Workmen’s
compensation for workers in factories and different pension schemes were
developed at this time.

Government at the time had serious problems with motor vehicles. They were a
necessary evil and therefore it could not proscribe them. It however had to do
something to address the problems it brought with it. This led to the
introduction of third party motor insurance by passing the Third Party Rights
Against Insurance Act, 1930. The legislation conferred certain rights on third
parties against insurers in the event of the third parties sustaining injuries in
accidents. The right however only existed only if the insured was insolvent, the
statute gave the third party a right to benefit from the insurance contract to
which the third party was privy.

The Act did not give complete protection to injured third parties, as it was opt
compulsory. This meant that some owners did not insure their vehicles and
therefore third parties injuries through the use of such uninsured vehicles could
not benefit under the law. It was to cover these defects that the Road Traffic
Act, 1930 was passed. It introduced strict highway rules and a system of
compulsory motor insurance.

The effects of compulsory third party insurance are several. It creates a positive
statutory duty to insure for the protection of any person who might be injured. It
also resulted in a general increase in damages awarded by the court for injuries
sustained by third parties. The law necessitated interference into the privity of
the contract of insurance between the insurer and the insured by a stranger to the
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contract, giving him certain rights or benefits from the contract. For compulsory
insurance to work effectively, two things must exist. In the first place, the
policies must be wide enough to cover all circumstances of liability. Secondly,
there must be sufficient machinery to ensure that all motorists insure against
third party risks. The law was however not effective. It did not prevent insurers
from limiting their liability. The insurer was still able to restrict the extent of
cover in any risk, for example the insurer could disclaim liability for no-
disclosure and misrepresentation. The effect of this was that some injured third
parties remained uncompensated.

To cure this defect the Road Traffic Act 1934 was promulgated. It attempted to
increase the rights of injured third parties. It introduced section 10 which
provided that in the if an third party obtained a formal judgement against an
insured in respect of liability covered by the policy the insurers would be liable
to pay the amount of the judgement notwithstanding that they were entitled to
avoid the policy. A third party could now be paid irrespective of whether the
insurer had rights to avoid the contract. The law also gave rights to insurers to
claim from the insured if they settled in circumstances where they were entitled
to avoid the contract. This increased the chances of third parties getting
compensation for third parties. The number of insurers disclaiming liability
necessitated this law.

Loopholes were still there in the law. Third parties could still find themselves
without a remedy. For example in hit and run accidents, insolvent insurers, risks
that were not covered by the policy such where the risk covers the driver or
owner and the accident is caused by someone else. Other statutes came up later
to seal loopholes. The provisions of the English statutes mentioned above form
the core of the Kenyan law.

The Kenyan Law

In Kenya the Insurance (Motor Vehicle Third Party Risks) Act (Cap 405) was
passed in 1945. it is modelled on the English statutes. The circumstances
leading to its enactment were similar to those obtaining in England at the time
the English statutes were passed. There was an increase in the importation and
use of motor vehicles into Kenya leading to more accidents on Kenyan roads
occasioning more casualties, both in terms of life and property. Most of the
insurers in the market were British and the colonial government had to persuade
them to insure Kenyan motor vehicles. The British insurers were not interested
in indigenous third party interests.

The purpose of the Act is stated in the preamble, it is to enable third parties who
have been injured from the use of motor vehicles to recover compensation eve n
if the person who inflicted the injury is not in a position to pay any
compensation awarded.

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Section 4(1) makes it unlawful for any person to use or permit to be used a
motor vehicle on the road unless a policy of insurance in respect of third party
risks is in place. Under section 4(2) any contravention of section 4(1) is an
offence punishable by a fine or imprisonment or both. These two provisions
impose a statutory obligation upon all motor vehicle owners to cover by
insurance any risks to third parties. The owner of a motor vehicle does not cover
any body who might use the vehicle, the policy must cover some person or
classes of persons who have to be specified in the policy. It may be restricted to
the owner himself or his drivers or even specified members of his family. This
cover takes care of liability insured whether as injury to the person, death and in
some cases damage to property.

Once the insurance policy covering third party risks is in effect, the injured third
party has a right to claim from insurers. The insurance policy has warranties and
conditions limiting disclaimer of liability by insurers, and therefore protecting
injured third parties. The most important provisions dealing with warranties and
conditions are sections 8, 10 and 16. They are designed to protect injured third
parties against conditions limiting the liability of insurers.

Under section 8 any condition in a policy, which restricts the liability of the
insurer with respect to third party injuries, is of no effect. Once there is an
insurance policy, the insurer has to pay the injured third party regardless of
whether he is entitled to avoid the policy or not. The conditions in the policy
restricting liability will be effective as between the insurer and his insured, but
they will be of no effect with respect to the injured third party. By virtue of
section 8(2) the insurer can or should be reimbursed by the insured in all cases
where the insurer pays but could have avoided payment if the Act was not in
force. (See Alamanzane Kakooza vs. R (1960) EA 444).

Section 10 complements section 8. it provides that if there is a final judgement,

the insurer has to pay al the claims awarded in that judgement. Under the
provision there are exceptions to the rule. The provision does not apply where
notice of the proceedings has not been given to the insurer either fourteen (14)
days before or after the filing of the claim. The third party should notify the
insurer of any proceedings, whether intended or already filed in court. The
insurer must be notified of any suit by the third party filed against the insured.
The insurer is not entitled to pay where there is a pending appeal or in respect of
policies that are cancelled before the event. The provision will also not apply
where the insurer has filed a protest alleging that the policy was effected on the
strength of a misrepresentation or non-disclosure of a material fact. This would
only succeed if the protest were lodged before the proceedings are instituted. As
long as these exceptions exist the injured third party cannot benefit from the
policy. The only remedy available to the third party is a personal claim the
person causing the injury. The only problem with this remedy is where the
person causing the injury is impecunious.

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Under section 16 any conditions with respect to the matters specified in the
section which limit liability of insurers are ineffective. The main difference
between section 8 and section 16 is that whereas section 8 is general section 16
is specific. The matters set out in section 16 are: all matters regarding the age of
the third party, the physical or mental condition of the driver of the insured
vehicle, the mechanical condition of the insured vehicle, the no of passengers in
the vehicle, the area within which the vehicle is used and the value of the
vehicle itself. Nearly all motor vehicle policies have conditions limiting liability
with regard to such matters. A lot of policies state that the insurer is not liable
for injury to a person of above 65 years. Such a condition would be effective as
between the insured and the insurer. The insurer after paying the settlement to
the third party is entitled to recover from the insurer.

In R vs. Harnam Singh (1950) 24 KLR 10, a driver was acquitted of charges
arising from riding a motor cycle without a valid certificate of competence,
without a driving licence and without a policy against third party risks. The state
appealed against the acquittal. The issue that arose for determination was
whether the policy of insurance was valid where the person who was driving the
vehicle was not lawfully competent. Can an otherwise valid policy of insurance
be invalidated by the fact that the person driving the vehicle at the material time
was incompetent or unlicensed to drive? It was held that sections 8,10 and 16
would apply and make any condition limiting the liability ineffective. Insurers
could not avoid liability relying on the condition that the rider of the motorcycle
was not competent. The policy of insurance was said to be effective irrespective
of the rider’s lack of a valid licence. The court established the rule that as long
as the thing omitted to be done does not affect rights of third parties, the person
who has omitted to do the needful has not committed an offence under section
4(1) of the Act. The statutory duty is on the driver to have in effect a third party
policy; the fact that the driver did not have a valid licence or was incompetent
does not affect the rights of third parties so long as the third party policy was in
force. This approach was followed in R vs. Amani Maranda (1960) EA 281,
where similar arguments were raised and a similar decision made.

In The New Great Insurance Company of India Limited vs. Lillian Evelyn Cross
& another (1966) EA 281, where a respondent who had been injured in a motor
accident sued the owner of the vehicle and judgement was entered in his favour.
The driver at the time of the accident had been disqualified from holding a
licence, but had been permitted by the owner to drive the vehicle. The insurer
disclaimed liability on the ground that there had been a breach of condition by
the insured who allowed a disqualified person to use the vehicle. The court held
the insurer liable to the insured person. Section 8 of the Act makes ineffective
any condition limiting the liability of the insured under a policy so long as such
liabilities were not covered under section 5(b) of the Act. Any provision in a
policy dealing with disqualification must be treated as a condition coming
within section 8 of the Act. The liability in this case was found to be covered by
section 5(b) because the condition, which excluded liability, was rendered
54
ineffective by the Act. It was emphasised that it was the use of the vehicle, and
not the driver, that is covered by the policy under section 4(1).20

These three provisions take care of third party interests, but there is a common
law rule, which applies to or affects to the third party motor policy. The
common law rule somehow dilutes the protection given by sections 8, 10 and
16. The rule states that there is no liability without fault. The third party has to
prove that he sustained injuries and that it is the insured who is responsible for
those injuries. The injured third party has to prove negligence as against the
insured. The effect of this is that the means of benefiting from this type of
policy depends on tortuous liability. This brings complications that often restrict
the third party’s ability to get compensation. In most cases the court
proceedings take too long to conclude, witnesses may by then have forgotten
the details of the event, in some cases the injured third party and the insured are
the only witnesses and it becomes the story of one against the other (where the
third party dies there would be no witnesses at all), the injured third party may
himself be hospitalised for a very long time leading to disappearance of details
and litigation itself is very expensive. In all, due to these factors proving
negligence is often a Herculean task for most injured third parties.

The other provisions restricting cover are sections 5(b) and 4(3) of the Act.
Section 5(b) provides situations where the compulsory third party policy is not
required to cover third party injuries. It gives conditions under which the policy
will not cover third party injuries. (a) It does not cover liability in respect of
death or injury arising out of employment of an insured person. The probability
is that such employee would be covered under another policy, for example a
general accident policy or workman’s employment scheme. (b) It does also not;
in respect of non-public service vehicles, cover injuries sustained by passengers
in a vehicle that is not intended for fare paying passengers. Persons who are
hitching lifts are not protected. In Ramadhan Ali vs. R (1958) EA 344, the
appellant was driver of a commercial vehicle insured under a commercial
vehicle policy. The policy had an exception to the effect that it did not cover
risks for hire or fare paying passengers. The driver carried two women who
agreed to pay a fare. The vehicle had an accident and the women were injured.
The driver was convicted of using a motor vehicle without a third party motor
cover. On appeal his conviction was quashed on the grounds that the
requirement to take a third party cover applied only to those vehicles which
were normally used for carriage of fare paying passengers. This decision
narrowed down the effect of the Act. The intention of the Act was to cover all
injured persons. The court in this case fell in error because it followed English
authorities on the point. (c) It will also not cover injuries sustained out of
contractual liability.

20
See also Mbogo and another vs. Shah (1968) EA 91 and Ajwang vs. The British India General Insurance
Company Limited (1968) EA 436.
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Section 4(3) exempt all vehicles owned by the government and semi-
government authorities from the policy. The rationale is that these bodies may
have their own schemes of paying the persons injured through the use of their
vehicles. Tractors and other agricultural vehicles are also not covered, so long
as they use the road only for the purpose of moving from one farm to another.

It should be noted however that there is no mechanism to force the owner of

such vehicles to undertake this kind of risk. The current statutory mechanism is
against motor owners who have the brunt of the liability where they have not
made adequate statutory arrangements.

The serious limitations to the compulsory third party insurance remain (a) the
common law rule that there is no liability without fault and (b) too many
exceptions which exclude a large section of those people likely to get injured
from the use of motor vehicles. Some common law countries have taken steps to
deal with the common law rule that no liability without fault, by introducing a
no fault system where the injured person is not required to prove negligence or
fault on the party of the driver in order to get compensation.

10. CLAIMS

Introduction

Upon the risk insured against attaching the law requires or expects the insured
to place a claim with the insurer. There are several prerequisites of a formal
claim. The main requirements are that (a) the insurance policy has to be valid at
the time of the claim, (b) all conditions and warranties attendant upon the
contract have also been fulfilled and (c) premiums must have been paid
consistently. The prerequisites are that the insured should give notice of the
loss, giving full particulars of the loss and supported by proof of the loss. The
insured is obliged not to make fraudulent claims. These prerequisites express
themselves in the form of duties on the part of the insured.

Notice

This duty arises from the general obligation to good faith. The manner of the
duty depends on the type of policies. The notice does not have to be in writing,
an oral or viva voce notice is sufficient. The policy may expressly provide that
the notice has to be in writing. The notice does not have to be given by the
insured himself. An interested party in the insured property or an agent of the
insured can give the notice unless the policy provides otherwise. The notice
need not be given to the insurer personally, it can be given through an insurance
agent, unless the policy provides otherwise.

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The notice has to be given within a prescribed period of time. If no time is
specified it has to be given within reasonable time. Non-compliance with the
time stipulation or condition can render the contract voidable at the instance of
the insurer. Time can be extended depending on the nature of the contract or
policy. Insurers can extend time but they are entitled to damages caused by the
delay in giving notice.

Particulars of Loss

A condition is usually contained in all policies that the insured has to give
particulars of a loss. The manner of furnishing such information is usually in
standard form. A form has to be filled. The rules of non-disclosure and
misrepresentation apply here, and a policy becomes void or voidable where
these rules are operative.

Insured persons must give sufficient particulars of the loss sustained.

Sufficiency here depends on the source (insured) of the information and the
time within which the insured is required to furnish such information. Time is
usually of the essence; the information has to be filed within the time
prescribed.

Proof of Loss

The fact and extend of loss have to be proved. It has to be shown that the loss
arose from the peril insured against. This is a condition precedent to liability for
the insurer, who pays only upon proof of such loss. The rules relating to
causation and proximate cause apply here in determining whether the loss in
question has been caused by the peril insured against. In life insurance death has
to be proved and so has to be the title of the person claiming the money. The
circumstance surrounding the disappearance of the insured life counts a lot. If
the disappearing person was a criminal fugitive running away from justice the
presumptions does not stand. Proof in fire policies is on a balance of
probabilities. Proof of the source of fire is usually very difficult.

Burden of Proof

Onus of proving that the loss was caused by the peril insured against is on the
insured. If so proved the onus is discharged. The burden of proving that the loss
falls under an exception is on the insurer, and the rule of proxima causa applies.

In Slattery vs. Mauce (1962) Lloyds Reports 60, a yatch was totally destroyed
by fire. The insured claimed under the policy and the insurers disclaimed
liability claiming that the insured had set the yatch on fire deliberately. It was
held that all the insured had to do is to prove a prima facie case and he did so by
proving that a yatch had been destroyed by fire. Once he has done this, the onus

57
of proof shifts to the insurer to show that the fire was deliberately caused by the
insured.

In Regina Fur Co. Limited vs. Bosson (1958) 2 Lloyds Reports 423, fur owned
by the company was insured under an all risk policy. There was loss by theft
and was covered by the policy. The insured claimed, the insurer disclaimed
liability alleging that the insured had failed to prove that the loss by theft. It was
held that the insured had failed to establish a prima facie case that the loss had
been caused by theft.

In Nemchand Premchand Shah vs. South British Insurance Company (1965) EA

679, the appellants were dealers in wristwatches and other goods. They insured
the goods against loss by theft. On the material day the shop was broken into
and some goods were stolen. The insurers disclaimed liability alleging that the
loss was not caused by theft. At the trial evidence was adduced to establish the
cause of the loss. The court found that there was no burglary. This was because
on evidence it was shown that there was dust on the windowsill through which
the thieves were alleged to have broken into and undisturbed cobwebs, in spite
of the fact that there had been some breakages. On appeal the assured argued
that he had established a prima facie case. He did not have the onus of proving
how the shop was broken into and that such a burden had shifted to the insurers.
The Court of Appeal upheld the insurers contention that the insured had failed
to discharge the burden of proof on him. This was a sham burglary, there was
evidence that the shop was broken into from inside.

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