Insurance - Lecture notes Topic 2 PDF

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Lecture notes on Insurance Law....

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TOPIC 2: INSURANCE Insurance underpins virtually all commercial activities and many personal ones. Insurance is also a very important commercial activity, employing in the United Kingdom about the same number of people as live in Edinburgh. Plays important role in the economy – lots of people are employed in the insurance area Definition of insurance: a contract whereby…usually, but not necessarily for periodical payments called premiums, you secure yourself to some benefit, usually…the payment of a sum of money, upon the happening of some event. The event should be one which involves some amount of uncertainty. Uncertainty to whether it will happen or time it will happen. - Channell J in Prudential Insurance case.

1. Nature of Insurance Contract and Types of Insurance 1. INDEMNITY INSURANCE - On the whole, insurance is a contract of indemnity – i.e. the insured is indemnified for their loss and cannot recover more than their loss up to a maximum amount of money that the insured is prepared to pay out taking into account various considerations. The insured is indemnified against loss, damage or destruction suffered, e.g. motor insurance, fire insurance, theft insurance, marine insurance, building and contents insurance, etc. The event is uncertain to occur. 2. LIFE ASSURANCE – this is not concerned to the same extent with the indemnity principle. The insured event, i.e. death, is certain to occur. However, the precise timing of the death is uncertain. Commonality to both is that there is uncertainty as to the bad thing happening Insurance is about uncertainty/risk – this is the nature of insurance Law is almost identical in Scotland and England but there are some differences: 

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The Marine Insurance Act 1906 applies in both jurisdictions. This Act codified the common law and the great majority of the principles set out in the Act apply equally to non-marine insurance. The Consumer Insurance (Disclosure and Representations) Act 2012 applies to consumer insurance contracts in the UK. The Insurance Act 2015 applies to insurance contracts in the UK.

2. Purpose of Insurance: Guarding Against Uncertainty and Risk

Insurance is designed to provide safeguards in the event of misfortune or the occurrence of a risk – they allocate funds to protect them against this risk In the case of betting, you generate the risk by deciding to place the bet in the first place whereas with insurance, these are risks people live with and you are trying to mitigate this risk that they didn’t create Idea is that you spread the risk of people who suffer loss over the many who take out insurance A major issue underlying insurance law is that the insured knows much more about the risk he wishes to have insured than the insurer does. The insured is under a legal obligation to provide this information to the insurer – this protects the insurer so that they can continue to run their business and provide insurance coverage. In consumer insurance, the insured has to take reasonable care not to make a misrepresentation to the insurer In commercial (non-consumer) insurance, they must make fair presentation of the risk

3. Regulation of Insurance The activities of insurers are regulated by the Financial Services and Markets Act 2000 (FSMA) - essentially to ensure that insurance companies remain solvent and are run by fit and proper persons. FSMA also provides a specific dispute resolution mechanism under the auspices of the Financial Services Ombudsman in for consumers and micro-businesses.

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Third Parties (Rights Against Insurers) Act 2010 - provides those with claims against an insolvent insured with a direct right of action against the insolvent insured’s insurer. Mr A bashes into your car and is insured. He then becomes insolvement. Mr B wants to be compensated for the loss as result of Mr A’s negligence. He is insured but you don’t have a direct rights with his insurer. If insurer pays out to him, the money goes into the pot of his estate and gets paid out to his creditors to cover his debts. The Third Parties Act 2010 allows Mr B to have a direct right against Mr A’s insurer to get the money. This is important when there are insurance claims against a party who is insolvent

4. Definition of Insurance There is no single definition of insurance that is regarded as thoroughly satisfactory by practitioners, lawyers and academics. The following are judicial efforts at a definition: Scottish Amicable v Northern Assurance Company

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It is a contract … 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 occurrence of an uncertain contingency. Prudential Insurance Co v Inland Revenue Commissioners [1904] 2 KB 658, Channel J It must be a contract whereby for some consideration, usually but not necessarily for periodical payments called premiums, you secure to yourself some benefit, usually but not necessarily the payment of a sum of money, upon the happening of some event The Medical Defence Union Limited –v- Department of Trade [1980] Ch 82, Sir Robert Megarry VC: It appears that a contract is a contract of insurance if three elements are present…First, the contract must provide that the assured will become entitled to something on the occurrence of some event…Secondly, the event must be one that involves some uncertainty…Thirdly, the assured must have an insurable interest in the subject-matter of the contract. The benefit the insured is to receive must be a sum of money or an equivalent service measurable in financial terms

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Department of Trade and Industry v St Christopher’s Motorists Association [1974] 1 WLR 99 members of association paid an annual subscription in return the association provides them with a chauffeur in event that they are unable to drive. Is this contract of insurance? Held – contract provided benefit and you could value how much this service was worth in money and had all the characteristics of insurance Medical Defence Union v Department of Trade GO BACK OVER THIS CASE Held not a contract of insurance: to be an insurance contract , contract must provide that the insured will be entitled to some benefit on the occurrence of the event. The event will have some uncertainty about it: as a doctor you don’t know if you will be sued or not for negligence The beneficiary must be adversely affected by event when it happens but the something the insured becomes entitled to can’t just be a mere benefit to have application from the assistance to be considered, it had to be a service/assistance that was capable of being assessed in money or money’s worth. Because it was only a discretionary basis and not a mandatory basis this was not an insurance contract

5) Constitution of Contract of Insurance 

It is a contract so offer/acceptance/rules of contract apply

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Writing is not required for constitution of insurance contract under ROWA 1995 However s22 of the Marine Insurance Act 1906, provides that a marine insurance policy is inadmissible in evidence unless it is embodied in written form.

A. WHAT IS AN INSURABLE INTEREST  The insure has to have an insurable interest in the subject matter of the insurance  The insured must genuinely stand to suffer a loss if something happens that is covered by the policy e.g. you have insurable interest in your own house e.g. if it burns down but you don’t have insurable interest in someone else’s house 

The Life Assurance Act 1774 Section 1: “From and after the passing of this Act no insurance shall be made by any person or persons, bodies politick or corporate, on the life or lives of any person or persons, or on any other event or events whatsoever, wherein the person or persons for whose use, benefit, or on whose account such policy or policies shall be made, shall have no interest, or by way of gaming or wagering; and that every assurance made contrary to the true intent and meaning hereof shall be null and void to all intents and purposes whatsoever.”

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You cannot take out insurance on the life of someone for whom you have no interest Act also restricts value of policies taken out on other people that you do have an interest in: “The Life Assurance Act 1774 Act is important in that it imposes strict limits on who can insure the life of a third party, and also restricts the value of policies taken out by insureds on the lives of others - necessary to prove that the insured would suffer direct financial loss in the event of death of the life insured, and that the recovery under the policy will not exceed the insured’s pecuniary interest in the continuation of the life insured.”

Married Women’s Policies of Assurance (Scotland) Act 1880:  

Section 1 - A married woman can effect a policy of assurance on the life of her husband. Section 2 - The proceeds of a policy effected by a married man or woman on their own lives for the benefit of their children are deemed to be held in trust for the benefit of the children. Marine Insurance Act Section 5:

1. Subject to the provisions of this Act, every person has an insurable interest who is interested in a marine adventure. 2. In particular a person is interested in a marine adventure where he stands in any legal or equitable relation to the adventure or to any insurable property at

risk therein, in consequence of which he may benefit by the safety or due arrival of insurable property, or may be prejudiced by the loss, or damage thereto, or by the detention thereof, or may incur liability in respect thereof. INSURANCE   

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Macaura v Northern Assurance company owed money by company and was also sole shareholder company owned lots of timber and most of this was stored on the insurer’s land he takes out insurance in his own name for the timber – 2 weeks later the timber the timber was destroyed in fire. He made insurance claim but it was refused case went to court: HOL said insurer is entitled to avoid the claim Mr M didn’t have insurable interest in timber, the company did. He had no concern in the subject insured, his relation was to the company not to its goods – although he is in a worse position after the fire, this is because the company is worth less since its goods were destroyed Cowan v Jeffrey Associates similar facts Cowan is director and sole shareholder of company and has signed personal guarantees covering company’s indebtness and was owed quite a lot of money by the company Mr C inusred premises, however when premises were destroyed by fire, insurance was in his name but premises owned by company Held Macaura was binding on him and it was company who had insurable interest not him and so not entitled to claim on his insurance policy Mitchell v Scottish Eagle Insurance in case of partnership the only insurable interest was the partnership no partners in Mitchell could be identified as being insurable assets of the partnership the company that owns the asset has the insurable interest, not someone who has close ties with the company Fehilly v General Accident Fire & Life Assurance Corporation tenant of a ballroom in stirling had no interest in a building after/at the end of their lease if the lease did not place obligation upon tenants to reinstate the property following major damage, the tenants are only able to recover from the insurers the market value of the lease

In indemnity insurance the insurable interest must exist at the time of the loss Godsall v Boldero (1807) 9 East 72. There is some doubt as to whether an insurable interest must also exist at the time the contract is entered into but it seems this is probably required. However, in life assurance the requirement is that it must exist at the time when the contract of insurance was made and need

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not continue to exist at the time of the loss - Dalby v India & London Life Assurance Co (1854) 15 CB 365. insures life of duke of Cambridge – he had a direct financial interest as his income depended on the life of the duke of Cambridge at that time as he worked for him The dalby insurance company then reinsure with the India & London Life Assurance Co He cancels original policy after a period of time but remains in reinsurance contract with London life. Dalby claim on this when the duke dies London life refuse to pay out and say Dalby’s interest in the Duke’s life ceased when the revered cancelled the original policy Court disagreed – said contract was valid when it ws made and insurer couldn’t rley on a supervening event to escape from it The law on insurable interest has recently been reviewed in depth in the case of Feasey v Sun Life Assurance Co of Canada [2003] Lloyd’s Rep IR 637. artificial reinsurance scheme se tup whereby P were liable to their members for their ships for any fault of the ships for the lives on board. If any crew members died, the owner would be indemnified. Tried to arrange this covr of life assurance – objection was taken that P did not have an interest – they were too far away for direct life insurane. The court found there was such an interest, the court noted it was difficult to come up with a definition where you sya any set of circumstances insurance can cover. Every case has to be considered on it’s own facts however court will try to find an insurable interest

A. THE INDEMINTY PRINCIPLE The Insured must prove not only the occurrence of the insured peril, for example fire, but also that he has suffered in consequence a pecuniary loss, over and above any excess (or “retention”) which he has agreed to bear himself. “The sum insured” represents the maximum figure which the Insured can recover. It follows that over insurance doesn’t do you any good – you are only going to get back what you have lost When the item is damaged (partial loss), the insurer is generally required to pay to repair item to its pre-damaged condition. Where repairs are not carried out the standard measure of indemnity is the second hand value of the object in its pre damaged condition. It is possible to insure for “replacement as new”, but that will cost more In life assurance you can insure your own life for whatever sum you wish and there are no issues with double insurance. Not permissible to insure the life of another person for a value beyond what you will lose if they die: Life Assurance Act 1774, section 3.

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Application of the indemnity principle in the Leppard v Excess Inrsuance Co claimant purchases delapated cottage for £1500 – he buys solely to resell it

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he insures it for £10,000 – this sum represents its full value i.e the cost to replace it he then for some reason increases this to £14,000. There is then a fire and cottage is destroyed. He claims rebuilding cost of £8000. Insurers say they will only give them £3000 as this is the agreed market value of cottage in the state it was in before it was destroyed and this is price he would’ve been willing to sell it for anuthing over £3000 wouldve been a profit and therefore the indemnity principle forbid getting anymore than £3000

In English law, the right to indemnity is in legal terms the equivalent to a claim for unliquidated damages for breach of contract - it arises at the time of the loss event and not at the time when the insured makes a claim or the insurer wrongfully refuses to pay. In English law, the indemnity principle currently extends to denying the insured any ability to claim damages from the insurer for consequential losses flowing from the insurer’s failure promptly to pay a valid loss: INSURANCE CONTINUED Subrogation Another important thing that flows from indemnity is subrogation: insured is only entitled to receive what he has lost and not to profit The general rule is that the insured must never be more than fully indemnified. From the indemnity principle flows the right of subrogation. Subrogation is the right of an insurer who has fully indemnified the insured to stand in the shoes of the insured and to exercise (in the insured’s name) all rights that the insured could have exercised himself to recover from any source other than the insurers the whole or part of the financial loss he has sustained and for which he has been indemnified. This translates into the rule: right to subrogation by insurer: if insurer has paid an insured for a loss, the insurer can stand in the shoes of the insured and standing in the shoes of the insured means that he can exercise any rights that the insured has to recover from any source that loss

e.g. Car accident caused by A and B suffers a loss. B could sue A but most would claim insurance. Insurer pays out and once they have paid out/indemnified B for loss, the insurer can raise proceedings against A in delict in negligence in car accident to recover sums of money they paid to B. The insurer has to sue in the name of the insured: Caledonia North Sea Limited v London Bridge Engineering Limited

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Right doesn’t pass ot the insurer, the insured just steps into the shoes Since the insured has indemnified you, the law gives the insurance company the right to insist the insured authorized it to allow the insured name to be used in proceedings by the insurer The right of subrogation applies “from the top down” – Lord Napier & Ettrick v Hunter[1993] AC 713 – insurers, having indemnified the insured up to the limit of their policy, are entitled to their remedy out of funds received by the insured from a third party even though the insured’s loss might be greater than the sum insured. Your insurer on indemnifying you has the right to subrogation – stand in your shoes/in your name take action and if they get that, they can seek the amount they have indemnified you and you will be left with the rest Subrogation depends on the indemnity principle and so doesn’t apply to life insurance – therefore if you’re killed, the insurer can’t go against the person who killed you. Salvage If an insurer has paid a total loss then the wreckage of the insured object, if the insurer so wishes, becomes his property, and he is entitled to retain whatever he can realise from its disposal: Simpson & Co v Thomson Burrall

A. Proximate Cause The principle of indemnity for loss involves considering what losses are covered by the policy and also what risks are covered. It is not necessarily every thing that causes you a loss that will trigger you a right to claim The policy will usually specify the risks covered and will usally also specify against what perils Problems can arise where there are 2 possible causes, one of which is covered under the policy and the other is not  

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Ionides v The Universal Marine Insurance Co you are to look exclusively to the proximate and immediate cause i.e thing that is most closely connected/real and dominant cause of the loss and then determine whether this is covered by the policy Example of trying to find the proximate cause to determine if loss is covered by policy in Rausher v Borthwick ship covered by insurance damaged by collision causing a hole in the ship temporary repair is done for tow to harbor during tow in bad weather, the hole reopens and the ship sinks

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insurers held to be liable – policy didn’t cover perils of the sea but did cover damage caused by collision: question is was it collision or bad weather causing the loss? Court said: insurers are liable as everything subsequently happened could be directly traced back to collision without which none of the other things would have occurred and ship was covered for collision “You are not to trouble yourself with distant causes, or to go into a metaphysical distinction between causes efficient and material and caus...