An insurance contract is a type of a legal contract in which a type of risk is transferred to an insurance company in return of a premium by the policyholder. As by their nature, insurance contracts may be exposed to misconduct by both parties: the underwriter and the policyholder. Therefore six principles of insurance, which are recognised by law, were created to reduce this type of abuse. In the following pages I will explain these principles and show by practical examples how these are related to property Insurance. Insurable Interest This is one of the fundamental principles of insurance.
Without Insurable interest, insurance contracts can be compared to gambling. Insurable Interest is widely defined as a person who has an interest in the survival of the insured or in the preservation of the property that is insured. That is the policyholder will suffer a financial loss if the property is lost in a fortuitous event. Insurable interest is required by the policyholder from the application process till the expiry of the contract. The key elements of insurable interest are: * Subject matter * Financial Interest * Current Interest * Legal Interest.
Insurable Interest is important in property insurance as it will decrease deliberate acts. As a practical example imagine person A insures person’s B home for a premium of €500 with a sum insured of €50,000 by taking a fire policy. Person A does not have any interest in person’s B home (subject matter). Then person A deliberately sets a fire on person B’s home. Therefore the insurance company will fork out €50,000 to person A. With insurable interest Person A cannot insure person B’s home as he does not have any interest in it, as he will not suffer any loss if this home is destroyed by any event.
The policyholder must suffer a financial loss if he has an insurable interest in the subject matter. From the case of Lucena vs Crawford (1806) it was expressed that a person to insure something he must be interested in something in which he or she must suffer a financial loss and also suffers a deprivation when the property item is lost. Some examples of insurable interests are: Mortgagees and mortgagors The mortgagor is the owner of the property, while the mortgagor holds the property as a security. Landlord and tenant.
The landlord is the owner of the property, while the tenant is responsible for any damages that ensues the property. Utmost good faith Insurance policies are contracts of utmost good faith, which means that the insurer and the person who is applying for insurance have a duty to deal honestly and openly with each other in the negotiations that lead up to the formation of the contract. This principle must be shown by both parties: the insured and the insurer. Utmost good faith imposes two duties to both parties: 1) A duty not to misrepresent any facts related to the contract.
2) A duty to disclose all material facts related to the contract. Normally in insurance proposal forms, there will be questions relating to material facts. For example in the proposal form for fire insurance of Middlesea Insurance Company, there is a question which asks if the proposer had ever a renewal policy declined or a policy cancelled. If this is true the proposer has to give the reasons why. For example a policyholder is aware that his business operates less than 100m of a fireworks factory and does not disclose this material fact to the insurance company.
This would render this policy void as there was a breach of utmost good faith. All insurance policies will insert this principle under the ‘General Conditions’ Section. For example, in the GasanMamo Fire Insurance policy, this principle is listed as the 1st General Condition under the title ‘Misdescription’. Basically this condition states that if a fact is misrepresented or omitted, the policy will be rendered void. The wording of this condition is very similar to all other policies, such as that of Middlesea Insurance Company. The insurer also has the duty of utmost good faith.
A foreign case regarding this principle, Banque Financiere de la Cite S. A. vs Westgate Insurance Co Ltd (1991), the insurers were aware that insurance brokers had fraudulently issued cover notes for credit insurance to their clients. This was a breach of utmost good faith from the part of the insurer, and therefore the insurer was sued by the insured. In a local case law, TEG Industries Limited vs Gasan Insurance agency Limited (1999), the insurer repudiated a claim, as it stated that TEG industries did not disclose all the facts which were considered as material. Indemnity.
All property insurances policies are all contracts of indemnity, as opposed to benefit policies. This principle makes sure that the insured will be put in the same position as he enjoyed before the loss, and does not make any profit out of his loss. Some examples of how property insurers might indemnify the insured are: * Buildings: the normal method of indemnifying the insured is the cost of repair or construction of the property insured. Other ways of indemnifying the insured such as reinstatement might also be an option for the insurers. * Machinery and equipment: indemnity is normally given as the cost of repair.
If a particular machine is totally destroyed the insurers might indemnify the insured by purchasing a new machine less betterment. * Retail Stock: If stock is destroyed normally the insurers will indemnify the insured by cash. The amount of indemnity given will include any costs which are related with stock transportation, etc. In most insurance policies there will be variations in the principle of indemnity. Excesses, deductibles, franchises are all clauses in which the insured will receive less than full indemnity. In other cases such as a ‘New for old’ policy, the insured will receive more than a full indemnity.
Referring to the Middlesea Fire Insurance policy, 3 conditions support the principle of indemnity. These 3 conditions are: * Under the Special Conditions heading, the 1st condition states that the insured shall in no case will receive more than the sum insured. This supports Indemnity because the insured will never receive more than the amount of his loss. * The 10th condition refers to salvage. If the property concerned is in a state of total loss, the insurer will take possession of the property once the insured has been fully indemnified.
This policy related to indemnity, because once the insured receives full indemnity, he can make a profit out of his loss by selling the salvage. * The 19th condition states which will be the way of indemnifying the insured in case of a claim. Middlesea states that the way of indemnity will be the cost of the loss less any wear and tear. Subrogation Subrogation is a right which places the insurer in the shoes of the insured who suffers a loss as a result of a 3rd party by negligence. To acquire this right, the insurers must first indemnify the insured.
Subrogation supports the principle of indemnity as it does not allow the insured to claim compensation from the 3rd party and from the insurance company. If this is allowed the insured would be more than indemnified, and therefore making a profit out of the loss. A practical example of subrogation, a worker is installing a fire place in a house, and by his negligence a fire broke out causing all the furniture in the house in a state of total loss. The owner of the house has a fire insurance policy in place. He has two options: either to sue the worker or to claim under the policy.
If the owner opts to claim under the fire insurance policy and he is fully indemnified, the insurer has the right to sue the worker. This principle makes sure than the insured will not be more than indemnified, by suing the worker as well. The principle of subrogation is almost listed in all insurance policies. In the GMI accidental insurance policy, the 5th condition refers to subrogation. It states that the insured must allow the insurer to sue other 3rd parties which caused the loss in order to claim compensation.
In the case of Castellain vs Preston (1883), Preston (the owner) was selling his house for ? 3,100. A fire broke out in this house in the period between the signing of the contract and the completion of the sale. The seller claimed under his fire policy, and recovered ? 330. When the settlement of payment in the selling of the house was done, the buyer paid ? 3,100 without any deductions as a result of the fire. In this case Preston made a profit out of his loss by ? 330, and therefore was sued by his insurer. Contribution.
Contribution, as similar to subrogation also supports the principle of indemnity. This principle only applies to indemnity policies such as a fire insurance policy. Contribution arises when two or more policies have the following criteria: * Same subject matter * Same peril * Same insurable interest * Same loss When a loss occurs and the insured have more than two policies, and all the above criteria are met, one of the insurers has a right to contact the other insurer so they will share their indemnity payments.
Mainly this principle was created to prevent the insured into claiming more than once in indemnity policies. For example a company have two policies in place for its showroom in Mosta, a fire policy by insurer A and an all risks policy by insurer B. A storm occurred and by lightening the Mosta branch caught fire and was in a state of total loss. The owner cannot receive compensation from both insurers, and contribution has to take place as the two policies had the same subject matter (the showroom), same peril (lightening), and same insurable interest (as an owner).
Therefore if the policyholder claims from insurer A, the policyholder must disclose that he has another same policy covering the same loss with another insurer. Then after Insurer A will indemnify the policyholder, A can contact insurer B to contribute to this loss by choosing a specific formula. Contribution is often included as a general condition in most policies. In GMI Fire Insurance policy, the 16th condition refers to contribution. GMI makes it clear that if other insurances exist, the company will not pay more than its rateable proportion of the damage.
Proximate Cause The doctrine of proximate cause first appeared in the Marine Insurance Act 1906. This act provided the definition of proximate cause as: “Unless the policy otherwise provides, the insurer is liable for any loss proximately caused by a peril insured against, but he is not liable for any loss which is not proximately caused by a peril insured against. ” Proximate cause can sometimes be difficult to be determined as many events takes place prior a loss.
There might be events which are excluded, insured or not insured, which will all have different treatment on the amount to be paid to the insured. If for example if there was a chain of unbroken events, with no excluded peril involved, and the 1st event was insured, then the entire claim will be paid. In the case of Tootal Broadhurst Lee Company vs London and Lancashire Fire Insurance Company (1908), an earthquake caused a stove to overturn and the house caught fire. The fire spread with the help of the wind from one house to another until it reached the insured building.
The insured claimed under his fire policy, but as the proximate cause was determined as the earthquake, and this cause was excluded and there was an unbroken chain of events, the insured didn’t recovered anything. In the industrial all risks policy of Montaldo Insurance agency, the proximate cause is referred to in part A of the excluded causes. It states that it will not pay for damages which the proximate cause was an excluded peril. However if the proximate cause was not an excluded peril, but an excluded peril had a part in the series of events, the insurance company will only pay for the ensuing damage of the insured peril.
Bibliography The Chartered Insurance Institute. Chapter 6: Making the contract, pg9. (2004) The Chartered Insurance Institute. Chapter 7: Utmost good faith, pg14. (2004) TEG Industries Limited vs Gasan Insurance agency Limited. Case Law No. 155/99JRM (2009) The Chartered Insurance Institute. Chapter 12: Subrogation and Contribution, pg6. (2004) The Chartered Insurance Institute. Chapter 10: Making the claim, pg13. (2004) The Chartered Insurance Institute. Chapter 10: Making the claim, pg15. (2004).
[ 1 ]. 2004. The Chartered Insurance Institute. Chapter 6: Making the contract, pg9. [ 2 ]. 2004. The Chartered Insurance Institute. Chapter 7: Utmost good faith, pg14. [ 3 ]. 2009. TEG Industries Limited vs Gasan Insurance agency Limited. Case Law No. 155/99JRM [ 4 ]. 2004. The Chartered Insurance Institute: Chapter 12: Subrogation and Contribution, pg6. [ 5 ]. 2004. The Chartered Insurance Institute. Chapter 10: Making the claim, pg13. [ 6 ]. 2004. The Chartered Insurance Institute. Chapter 10: Making the claim, pg15.