LAW OF INSURANCE

OBJECTIVE
To provide the candidate with a broad
understanding of the following
concepts pertaining to the Law of
Insurance;
Nature of the contract
Formation of the contract
Principles of Insurance.
DEFINITION OF KEY TERMS AND PHRASES
Insurance: a contract whereby a person undertakes to pay a premium so
as to be paid a sum of money upon the occurrence of the event insured
against.
Insured: the person who takes out a cover and promises to pay a money
consideration.
Insurer: the party that undertakes to pay out compensation if the event
insured against occurs.
Insurable interest: the interest a person has in the subject matter
which he stands to loose in the event of its loss or destruction
Indemnity: is a contract whereby the insured takes out a policy on the
understanding that when loss occurs he will be indemnified for loss
Subrogation: It means that after indemnifying the insured, the insurer
becomes entitled to all the legal and equitable rights in respect to the
subject matter previously exercisable by the insured.
Reinstatement: This is the repair or replacement of the subject
matter in circumstances in which it may be re-instated.
Premium: Payment made by insured to insurer.
Risk: It is the chance of loss, the probability of loss or the
probability of any outcome different
from the one expected.
Double Insurance: This is a situation whereby a party takes
out more than one policy on the
same subject matter and risk with different insurers but where
the total sum insured exceeds the
value of the subject matter.
Proximate clause: An insurer is only liable where
loss is proximately caused by an insured risk
and not liable where the risk is excepted Under this
principle, the proximate and not the remote
cause is to be looked to. (causa proxima non remota
spectatur)
Policy: Written contract or certificate of insurance.
Wagering Contract: Betting contract.
 WHAT IS INSURANCE?
This is a contract whereby a party known as the insurer undertakes,
in consideration for a sum of money known as premium paid by the
insured, to pay a sum of money or its equivalent on the happening of
a specified future event.
The insurance contract is a contract like any other, but with
particular peculiar principles. The insurable interest should be
beyond the control of either party and there must be an element of
negligence or that there is uncertainty. Contracts dealing with
uncertain future events are either alieatory, contingent or
speculative. In insurance risk exists in priori, whether or not we
insure.
However in a wager/stake/ gamble there is no insurable interest.
It has been observed that the contract of insurance is basically
governed by rules which form part of the general law of contract. But
equally, there is no doubt that over the years, it has attracted many
As a general rule statutes dealing with the regulation of insurance business
do not or have not defied the contract of insurance to obviate the danger of
excluding contracts within or that should be within their scope. However a
defiition is essential as insurance business is closely regulated.
In the words of Ivamy, General Principles of Insurance,
A contract of insurance in the widest sense of the term may be defied as a
contract whereby one person called the insurer undertakes in return for the
agreed consideration called the premium, to pay to the other person called
the assured, a sum of money or its equivalent on the happening of a specified
event
In the words of John Birds, in his book, Modern Insurance Law,
It is suggested that a contract of insurance is any contract whereby one
party assures the risk of an uncertain event which is not within his control
happening at a future time, in which event the other party has an interest and
under which contract the fist party is bound to pay money or provide its
equivalent if the uncertain event occurs.
In the words of Channel J, in Prudential Assurance CO. Ltd v. Inland Revenue
Commissioner
A contract of insurance then must be a contract for the payment of a
sum of money or for some corresponding benefit such as the rebuilding
of a house or the repairing of a shape to become due on the happening
of an event, which event must have some amount of uncertainty about
it and must be of a character more or less adverse to the interest of the
person effecting the insurance
The Judge further observed that, it must be a contract whereby for
some consideration usually but necessarily for periodical payments
called premiums, you secure yourself some benefit usually but not
necessarily the payment of a sum of money upon the happening of
some event
Lord Clerk in Scottish Amicable Heritage Securities Association Ltd v.
Northern Assurance Co [1883].
It is a contract belonging to a very ordinary class by which the insurer
undertakes in consideration of the payment of an estimated equivalent
beforehand to make up to the assured any loss he may sustain by the
assurance of an uncertain contingency.
 ESSENTIALS OF AN INSURANCE CONTRACT
1. Agreement
For a contract of insurance to exist, there must be an agreement under
which the insurer is legally
bound to compensate the other party or pay the sum assured
[premium]. This is the consideration
that passes between the parties to support the transaction. It is
asserted that premium is the
considerations which the insurers receive from the insured in exchange
for their undertaking to
pay the sum assured in the occurrence of the event insured against.
Any consideration suffiient
to support a simple contract may constitute a premium in a contract of
insurance.
2. Uncertainty
The insurance contract is aleatory, contingent or speculative as it deals
with uncertain future
events. For an event to be Insurable it must be characterized by some
uncertainty. In the words of
Channel J in Prudential Assurance Co. Ltd v. Inland Revenue Commissioner
then the next thing
that is necessary is that the event should be one which involves some
amount of uncertainty.
There must be either some uncertainty whether the event would ever
happen or not, or if the
event is one which must happen at some time or another, there must be
uncertainty as to the
time at which it would happen
3. Insurable Interest
The insurable event must be of an adverse nature .i.e. the
insured must have an Insurable
interest in the property, life or liability which is the subject of the
insurance. Insurable interest is
said to be the pecuniary or fiancial interest which is at stake or in
danger if the subject matter is
not insured. It is a basic requirement for the contract of
insurance.
4. Control
The insurable event must be beyond the control of the party
assuring the risk as it was held in
Re Sentinel Securities P.L.L
5. Accidental or Negligent Loss
Insurance can only be effected where loss is accidental in nature
or is a consequence of a negligent act or omission. Loss
occasioned by intentional acts does not qualify for indemnity or
for payment of the sum assured. It was so held in Toxleth v
Hampton.
6. Risk
This is the central problem that insurance attempts to address. It is
understood to mean that in a given situation, there is uncertainty about
the outcome and a possibility exists that the outcome would be
unfavorable. Risk has been defied as the chance of loss, the probability
of loss or the probability of any outcome different from the one
expected. It is a condition in which there is
a possibility of an adverse deviation from a desired outcome that is
expected or hoped for. For individual proposes, risk is measured by the
probability of loss as the individual hopes that it would not occur.
The probability that it could occur is used to measure the risk. However,
where a large number of exposure units- policies- exist, it is possible to
predict the probability of loss which is the probability of an adverse
deviation from the expected outcome. The standard deviation is used
as a measure of risk. The higher the probability of loss the greater the
risk as the greater the possibility of loss the greater the probability of a
deviation from what is hoped for.
Risk differs from peril and hazards. A peril is the cause of loss while a
 11.2 ELEMENTS OF INSURANCE
1. Parties: The parties to an insurance contract are the insurer ad the
insured.
2. Premium: This is the consideration which passes from the insured to the
insurer to
support the contract.
3. Risk: This is the probability or chance of loss, it is the probability of an
outcome
adverse to what is expected or hoped for. Insurance is one of managing risk.
In an
insurance contract, risk exists in priori while in a wagering contract risk is
created by the contracted. It was so held in Robertson V. Hamilton
4. Uncertainty: For insurance to exist there must be uncertainly as to
whether the event will ever occur and if it must occur there must be
uncertainty as when it was so held in Prudential Assurance Company V.
Inland Revenue Commission
5. Insurable Interest: This is the monetary or pecuniary interest which a
 11.3 PARTIES TO AN INSURANCE CONTRACT
Insurer: This is the person who undertakes to pay the sum assured or
indemnity when the
insured event occurs. To carry on insurance business in Kenya, a person
must be a body
corporate (company) licensed by the Commissioner of insurance to do
business.
Insured: This is the person who takes out insurance cover, he is the
person who pays the
premium and may be a natural or artificial person. The insured must
have an insurable interest
in the subject matter of insurance.
 11.4 THE CONTRACT OF INSURANCE
A contract of insurance comes into existence when an offer by the
proposer is accepted by the insurer.
The proposer makes the offer by completing and submitting to the
insurer the proposal form.
This form seeks information in relation to: -
1. Particulars of the proposer
2. Particulars of the subject matter
3. Circumstances affecting the risk and
4. The history of attachment of the risk
The proposer signs a declaration at the bottom of the form to the effect
that the answers given constitute the bases of the contract between him
and the insurer. The declaration is referred to as Basis of Contract
Clause. Submission of the proposal form to the insurer constitutes the
formal offer by the proposer. The insurer is not bound to accept the offer.
However, he may as he assesses the risk, extend temporal cover to the
proposer.
 COVER NOTE
This is the name given to the temporal cover extended to the
proposer by the insurer in the interim period between submissions of
the proposal form and its formal acceptance or rejection.
It may be a detailed document setting out the terms and conditions
of indemnity or may be simple letter from the company.
The issue of a cover note may be justifid on 2 grounds:
1. It is argued that insurance is formal and rigid hence time is of the
essence before cover is extended
2. It is necessary to extend immediate cover to the proposer since the
subject matter is exposed to risk.
If risk attaches/arises during currency of the cover note, the proposer
recovers in accordance with the terms of the cover note, if formal, or
on the basis of the policy applied for:
Cover notes generally last for 30 days.
 ACCEPTANCE OF THE PROPOSAL FORM

The insurer is not bound to accept the proposers offer, however, if

the accepted, it signifies a
contractual relationship between the two. The insurer may signify
acceptance of the proposal
form;
1. By formal communication
2. By conduct
3. Issue of the policy
4. Acceptance and retention of premium raises a presumption of
acceptance of the proposal form.
11.5 COMMENCEMENT OF INSURANCE COVER

As a general rule, cover commences at the time and date

specified by the cover note or policy.
However, if neither is specific as to the time, cover
commences at the beginning of the next full
day and a full day is a period of 24 consecutive hours from
midnight.
 11.6 TERMINATION OF INSURANCE CONTRACT
An insurance contract may come to an end or terminate in any of
the following ways:-
1. Payment of Indemnity or the sum assured in the event of total loss. In
the case of
partial loss, reinstatement does not terminate the policy.
2. Mutual agreement: The parties may at any time agree to terminate the
contract at
the instance of the insured. In property insurance, the insured becomes
entitled to
the surrender value of the policy. In life policies, if the insured has been a
bona fie
insured for 3 years he is entitled to 75% of all premium paid inclusive of any
bonuses
and interests payable.
3. Breach of condition or warranty: The insurer is entitled to apply for
cancellation of the policy if the proposer breached a condition or warranty to
procure the policy e.g. Misreprentation or non-disclosure of material facts.
 11.7 CLASSIFICATION OF INSURANCE
CONTRACTS
Insurance contracts may be classified on the basis of:-
1. The event insured: The category of insurance derives its name from
the event e.g.
fie, burglary, marine, fidelity, motor etc.
2. The Interest Insured: The classification places contracts in 3
categories namely: -
a. Personal Insurance e.g. Life Insurance
b. Property Insurance
c. Liability Insuring e.g. NSSF, NHIF, 3rd Party Motor Insurance
3. Nature of the Contract: -
a. Indemnity
b. Non-Indemnity
Indemnity is a contract whereby the insured takes out a policy on the
understanding
that when loss occurs he will be compensated for the loss. This is property
insurance
4. Whether Private or Social: private insurance is optional while
voluntary, social or compulsory insurance is a statutory
requirement e.g. 3rd party Motor Insurance.
5. Basis of the Programme:
a. Insurance
b. Reinsurance: This is a contract in which an insurer insures
himself with re-insurer
against the risks he has insured against. It may be voluntary or
compulsory.
 11.8 PRINCIPLES OF INSURANCE
The Principles includes:-
1. Insurable Interest
2. Utmost good faith (Non-disclosure)
3. Indemnity
4. Subrogation
5. Salvage
6. Re-instatement
7. Contribution and Apportionment
8. Proximate Cause
9. Abandonment
10. Average Clause
11. 3rd Party Insurance
1. INSURABLE INTEREST
This is the financial or monetary interest at stake or in danger if the
subject matter is not insured.
It is the interest a person has in the subject matter which he stands
to lose in the event of its loss
or destruction.
Insurable interest is a basic requirement of any contract of
insurance unless it can be and is
lawfully waived. At a general level this means that the party to the
insurance contract who is
the insured or policy holder must have a particular relationship with
the subject matter with the
insurance whether that be, a life or property or a liability to which
he might be exposed
Every of insurance contract requires an insurable interest to support it,
otherwise it is invalid. This was held in Anctil Vs Manufacture Life Insurance
Co. [1899]
Insurable interest is essentially the pecuniary or proprietary interest which is
at stake or in danger should the insured opt not to take out an insurance
policy on the subject matter. It is the interest which the insured stands to
lose if the risk attaches.
The classical definition of insurable interest was given by Lawrence J in
Lucena v. Crawford [1806] A man is interested in a thing to which an
advantage may arise or prejudice happen from the circumstances which may
attend it and whom it imported that its condition as to safety or other
quality should continue, interest does not necessarily imply a right to the
whole or a part of a thing, nor necessarily and exclusively that which may be
subject of privation, but the having some relation to, or concern in the
subject of the insurance, which relation or concern by the
happening of the perils insured against may be so affected as to produce a
damage, detriment or prejudice to the person insuring, and where a man is
so circumstanced with respect to matters exposed to certain risks or
In Lucena v. Crawford (1806) it was observed that a person has an insurable interest in a
subject
matter if he stands to gain by its continued existence and stands to lose in the event of its
destruction.
To ascertain whether a person has insurable interest in subject matter, courts
employ the
following rules: -
1. There must be a direct relationship between the insured and the subject matter.
2. The insured bears any loss or liability arising
3. The insured must have a legal or equitable interest /right in the subject matter
4. The insureds interest/right must be capable of fiancial/pecuniary estimation or
qualification.
Who has an Insurable Interest?
Every person who has a legal or equivalent interest/right in a subject matter
has an insurable interest therein. Every person has an insurable interest in
his life.
Under Section 94 (2) of the Insurance Act1, the following people have
insurable interest in the lives of the other:
1. A wife in the life or the husband
2. A husband in the life of his wife. In Grifih Vs Fleming [1909] it was held
that a husband has an insurable interest in the life of his wife and vice
versa.
3. A parent or a guardian of a child below 18 years in its life to the extent of
the funeral
expenses
4. An employer in the life of the employee to the extent of the services
rendered. In Hebdon v. West (1863), it was held that an employer has an
insurance interest in his employeesto the extent of the services rendered
and an employee has an insurable interest in the life of an employer to the
extent of their relationship.
Time of Insurable Interest
1. In Indemnity contracts e.g. fie, marine, burglary etc. it must
exist at the time of loss.
2. In life Insurance, it must exist when the contract is entered
into.
Insurable interest creates a direct relationship between the
insured ad the subject matter. It gives
insured the necessary locus standi to enforce the
contract. However it has also been used by
insurers to escape liability.
2. NON-DISCLOSURE / UTMOST GOOD FAITH
The duty to disclose exists throughout the negotiation period. It generally
comes to an end when the proposal form is accepted. It was so held in
Lishman V. Northern Marine Insurance Co.
Effect of Non-Disclosure
The non-disclosure of a material fact by either partly renders the contract
voidable at the option of the innocent party. In London Assurance Company
V. Mansel (1879) when responding to a question in the proposal form, the
proposer stated that no other insurer had declined to take his risk; in fact 2
companies had previously declined to insure him. Subsequently, the insurer
sought to avoid the contract on the ground of non-disclosure of a material
fact. It was held that the contract was voidable at the option of the insurer
for the concealment of material fact. A similar holding was made in Horne
v.Poland (1922) Although the contract of insurance is one of the utmost
good faith certain matters need not be disclosed e.g.:
a) Provisions and propositions of law
b) Unknown facts as was the case in Joel v. Law Union and crown Insurance
Company
3. INDEMNITY
This principle means that when loss occurs, it is the duty of the insurer to
restore the insured to the position he was before the loss. The insurer
must so far as money can do; put the insured to the position he was
before the loss. Indemnity means that there should be no more or no less
than restitutio in integrum.
Indemnity is a basic principle in property insurance; it has its justifications
in equity in that in its absence the insured is likely to benefit from the
contract.
In the words of Brett L.J in Castellain v. Preston, The insured is to be fully
indemnified but is never to be more than fully identified.
The principle of indemnity ensures that it is the duty of the insurer to
ascertain whether there are circumstances which reduce, diminish or
extinguish the loss as they have a similar effect on the amount payable
by the insurer for the loss. E.g. if the tortfeasor makes good the loss, the
insurer is not liable to indemnify the insured as was the case in Darell v.
Tibbitts, where a house was destroyed by fie through tenants negligence
4. SUBROGATION
This means that after the insurer has indemnifid the insured, he
steps into the shoes of the
insured in relation to the subject matter.
It means that after indemnity the insurer becomes entitled to all the
legal and equitable rights
respect the subject matter previously exercisable by the insured.
Subrogation facilitates indemnity by ensuring that the insured does
not benefi from the contract.
It is an inherent and latent characteristic of the contract of
indemnity that becomes operative after
full indemnity.
The insurer cannot under subrogate rights recover more than the
amount payable as indemnity
as was the case in Yorkshire Insurance company Ltd. v. Nisbett
Shipping Co.
5. SALVAGE
This is the recovery by the insurer of the remains of
the subject matter after indemnity. It is part
of subrogation and facilities indemnity. It is justified
on the premise that the amount paid by the
insurer as indemnity includes the value of the
remains.
6. RE-INSTATEMENT
This is the repair or replacement of the subject matter in
circumstances in which it may be reinstated. Most indemnity
policies confer upon the insurer an option to pay full indemnity or
reinstate the subject matter.
The insurer must exercise his option within a reasonable time of
notifiation of loss and is bound
by his option. If the insurer opts to re-instate, the subject matter
must be re-instated to the satisfaction of the insured.
Any loss or liability arising in the course of re-instatement is borne
by the insurer. The economic
effect of re-instatement is to benefi the insurer by ensuring that he
only pays full indemnity where
the re-instatement is not possible.
7. DOUBLE INSURANCE
This is a situation whereby a party
takes out more than one policy on the
same subject matter
and risk with different insurers but
where the total sum insured exceeds
the value of the subject
matter.
8. CONTRIBUTION AND APPORTIONMENT
If an insured has taken out more that one policy on the same subject matter
and risk with different insurers and loss occurs, the twin principles of
contribution and appointment apply: -
a) If the insured claims from all the companies at the same time, they
apportion the loss between themselves on the basis of the sums insured.
Each insurer bears part of the loss. This is the Principle of
Apportionment
b) If one of the insurers makes good the total liability to the insured, such
insurer is
entitled to recover the excess payment from the other insurers. This is the
Principle
of Contribution. This principle is to the effect that an insurer who has
paid more that
his lawful share of the loss is entitled to receive the excess from the other
insurer.
The principle of contribution is equitable. An insurer is only entitled to
contribution if the following conditions exist;
9. ABANDONMENT
This is the surrender by the insured of the remains of the subject
matter for full indemnity. It
entails the giving up the res (residue) to the insurer for indemnity.
This principle has its widest
application in Marine Insurance but generally applies in case of: -
1. Partial Loss
2. Constructive total loss.
The insured must notify the insurer of his intention to abandon the
subject matter. However, it is
for the insurer to determine whether or not abandonment is
applicable. If the insurer opts to pay
full indemnity, it signifis the suffiiency of the insureds notice and it
is an admission of liability.
The insurer becomes entitled to the remains of the subject matter.
10. PROXIMATE CAUSE
An insurer is only liable where loss is proximately caused by an
insured risk and not liable where the risk is excepted. The principle
of proximate cause protects the insurer from undue liability.
Under this principle, the proximate and not the remote cause is to
be looked into. (Causa proxima non remota spectatur)
The proximate cause of an event is the cause to which the event is
attributable. It is the cause which is more dominant direct, operative
and efficient in giving rise to the event.
Courts have not developed any technical test of ascertaining what
the proximate cause of an event is. They rely on common place
tests of the reasonable man and that among competing
causes, one must be more dominant that the rest. The proximate
cause need not be the last on
the chain but must be the must operative in occasioning the loss
10. PROXIMATE CAUSE
An insurer is only liable where loss is proximately caused by an insured
risk and not liable where the risk is excepted. The principle of proximate
cause protects the insurer from undue liability.
Under this principle, the proximate and not the remote cause is to be
looked into. (Causa proxima non remota spectatur)
The proximate cause of an event is the cause to which the event is
attributable. It is the cause which is more dominant direct, operative
and effiient in giving rise to the event.
Courts have not developed any technical test of ascertaining what the
proximate cause of an event is. They rely on common place tests of the
reasonable man and that among competing
causes, one must be more dominant that the rest. The proximate cause
need not be the last on
the chain but must be the must operative in occasioning the loss
12. THIRD PARTY INSURANCE
A person can insure himself against the risks of incurring liabilities to third
parties. Under the
Insurance (Motor Vehicles Third Party Risks) Act, every driver of a motor
vehicle is required
to be insured against liability in respect of death or bodily harm to a person
caused by the use
of the vehicle on the road. Under the Act, it is an offence to use a motor
vehicle on the road
without having in force an insurance policy in respect of injuries to third
parties. The policy is only considered valid when a certifiate of insurance
has been issued.
This is Insurance against risks to people other than those that are parties to
the policy. It is illegal to use, or allow anyone else to use, a motor vehicle
on a road unless there is a valid insurance policy covering death, physical
injury, or damage caused by the use of the vehicle. It also covers
any liability resulting from the use of a vehicle (or a trailer) that is
A judgement against the insured in respect of any liability
arising for causing death or bodily
harm can be enforced against the insurer. The insurance
companies are not allowed to insert
conditions that would terminate third party insurance on the
happening of a given event because
if it is allowed, the victims of road accidents will suffer
tremendous hardships.