A.

SPECIAL PRINCIPLES OF INSURANCE CONTRACTS

1. Insurable interest

1.1 Definition

Legal right to insure arising out of a financial relationship, recognized at law, between the insured and the
subject-matter of insurance.
The subject matter of insurance can be any form of property or an event that may result in the loss of a
legal right or the creation of a legal liability e.g. buildings under fire insurance, a person’s legal liability for
injury or damage under liability insurance, life being insured under life assurance, a ship and its cargo in
marine insurance.
What is insurable is the insured’s financial interest in the insured item.
The financial interest which the person has in the subject-matter of insurance is called the subject matter
of contract.
1.2 Essentials Features of Insurable Interest
(a) There must be some property, right, interest, life , limb or potential liability capable of
being insured.
(b) Such property, right, interest, etc, must be the subject matter of insurance.
(c) The insured must stand in a relationship with the subject matter of insurance whereby
he benefits from its safety, well being or freedom from liability and would be prejudiced
by its damage or the existence of liability.
(d) The relationship between the insured and the subject-matter of insurance must be
recognized at law.
1.3 History
Insurance over the ages was possible even if the insured had no insurable interest in the subject-matter of
insurance. This distasteful practice which also served as an inducement to murder and other unscrupulous
activities was halted by the enactment of the following legislation:
(a) Marine Insurance Act 1745
This act forbade the issuing of marine policies without insurable interest in the subject-matter of
insurance.
(b) Life Assurance Act 1774
This Marine Insurance Act 1745 related to marine insurance only and it was still possible to gamble on
people’s lives and other events.
The Life Assurance Act 1774 forbade issuing of life policies without insurable interest. Failure to show
interest makes the policy illegal.
This Act provided for the following:
1. Insurances on lives of people or any event in which the beneficiary had no interest were null and void.
2. The name of the beneficiary was to be inserted in the policy.
3. No amount greater than the interest of the insured could be recovered.
4. The Act did not extend to insurances on ships, goods, or merchandise.
(a) Marine Insurance Act 1778
Under the Marine Insurance Act 1745, goods unconnected with the ship could be insured with no
insurable interest. The Marine Insurance Act 1778 stopped the practice and made it compulsory for names
of people interested or concerned to be inserted in the policy.
The effect was that insurance contracts where no insurable interest exited were null and void.
(b) Marine Insurance Act 1906
This Act repealed the 1745 Act and those parts of the 1788 Act to marine insurance. It codified these Acts
and declared void any marine insurance where no insurable interest existed at the time of loss.
(c)Marine Insurance (Gambling Policies) Act 1909
This Act made gambling or wagering contracts illegal. It also made it criminal to effect a marine insurance
policy where no insurable interest existed.

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Comparison of Insurance and Wagering contracts
Insurance Contract
Insurable in the subject-matter is essential
The insured is protected from loss and his identity
is known before the event
Full disclosure (uberrimae fides) is required by both
parties to the contract
In most case an indemnity only is secured
The contract is enforceable at law
Wagering Contract
The interests are limited to the stake to be won or
lost and are not recognized at law
Either party may win or lose and the losser can only
be identified after the event
Full disclosure (uberrimae fides) is not required by
either party
The stakes are not paid by way of indemnity.
Payment is made without suffering loss beforehand
Neither party has any legal remedy

1.4 Creation of Insurable Interest

Insurable interest may arise at common law, e.g. ownership of property or the potential liability a
negligent driver has for a claim from an injured pedestrian.
Insurable may arise from contracts e.g. lease making a tenant responsible for the maintenance or repair of
the building. The lease agreement places the tenant in a legally recognized relationship to the building and
gives them an insurable interest.
1.5 Application of Insurable Interest
The principle of Insurable Interest is applied differently to the various forms of insurance.
(a) Life Assurance
Everyone has unlimited insurable interest in his own life. Theoretically he is entitled to effect a policy for
any sum assured. In practice, ability to pay the premium often limits the amount of the sum assured the
person can purchase.
In addition insurable interest exists in the following relationships:
- Spouses in each other’s lives to an unlimited extent
- Business partners in each others lives up to the limit of their financial involvement.
- Creditor in the life of the debtor to the extent of the loan plus interest.
- Parents in the lives of their children subject to limits as provided for in the Insurance
Act Chapter 24:07
Blood relationships do not on their own imply automatic insurable interest.
(b) Property Insurance
In property insurance, insurable interest usually arises out of the ownership of the subject matter of
insurance. For example, a house owner insuring his house, a golfer insuring his clubs, a shop owner
insuring stock.
Insurable interest may also arise from the following legal relationships and financial interests.
1. Part or joint owners – a person having a partial interest in a property must insure for the full value of
the property. Any money received in respect of claims exceeding his own financial interest should be
passed to the other owner(s).
2. Mortgagees and mortgagors – both have an interest. Purchaser as house owner. Mortgagor as
creditor.
3. Executors and trustees – they are legally responsible for the property under their charge.
4. Bailees – a bailee is a person legally holding goods of another either for payment or gratuitously. E.g.
pawnbroker, launderer, watch repairer. Each has a responsibility to look after the goods as if they were
his.
5. Agents – an agent can insure on behalf of his principal provided his principal has insurable interest in
the subject matter of insurance.
6. Husband and wife – each spouse has an insurable interest in the property of the other.
(b) Liability Insurance
Any person has an insurable interest to the extent of any potential liability he/she may incur. The potential
of liability has no limit but is largely based on legal precedents.

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1.6 When Insurable Interest must exist
In marine insurance the insured must have interest in the subject matter insured at the time of the loss.
In life assurance, insurable interest in only required at inception.
(Dalby v.The India and London Life Assurance Company (1854).
In other insurances insurable interest must exist both at inception and at time of loss otherwise it would
be a wager.
1.7 Common features of insurable Interest
(a) Insurer’s insurable interest
Insurance companies have an insurable interest in their ability to pay claims. This allows them to seek
reinsurance.
(b) Enforceable at law
The mere expectation of a benefit in future may not be enough to create insurable interest.
(c) Equitable interest
Reasonable interest is not enough to create insurable interest. For example a lender in a formal mortgage
before deed is drawn up.
(d) Possession
Possession of property accompanied by responsibility supports insurable interest.
(e) Criminal act
A person cannot recover under a policy in respect of his criminal acts. (Beresford v.Royal Insurance
(1938). This case concerned a suicide under a life policy.
1.8 Financial Valuation
Insurable interest must be capable of financial valuation. This is easy in property insurance. Valuation is
difficult in the case of one’s own life or life of a spouse where it is taken that there is unlimited interest.
On other policies on the life of another, certain interests are capable of valuation, e.g. creditor’s interest
on the life of a debtor for the amount of the debt, plus interest and insurance premium.
1.9 Assignment of Insurable Interest
Cession of an insurance policy (transfer of rights) can be carried out in the case of personal contracts with
the prior consent of the insurer is required. The insurer need to be satisfied by the day to day activities
and the attitude of the new insured as that may influence frequency and severity of a loss.
2 Utmost Good Faith
2.1 Non-Insurance Contracts
The doctrine of ‘caveat emptor” applies. It is the responsibility of each party to the contract to ensure that
they make a good or reasonable bargain.
The parties are under no duty to disclose information which is not asked for. As long as one party does not
mislead the other party and answers questions truthfully, the other party cannot avoid the contract.
2.2 Insurance Contracts
The proposer knows all the relevant facts about the risk being proposed. The underwriter can have a
survey carried out, but he must rely on information given by the insured in order to assess those aspects
of the risk which are not apparent at the time of a survey.
The law imposes a duty of utmost good faith on the parties to an insurance contract.
This was summed up by Scrutton LJ as follows:
As the underwriter knows nothing and the man who comes to him to ask him to insure knows everything,
it is the duty of the assured to make a full disclosure to the underwriter without being asked of all the
material circumstances. This is expressed by saying it is a contract of the utmost good faith. (Rozanes
v.Bowen (1928).
2.3 Reciprocal duty
The duty of full disclosure also rests on the underwriter. They must not withhold information from the
proposer, so as to him into a less favourable contract.
For example:
- Not to withhold from proposer that a sprinkler system in his premises entitles him to a
substantial discount on his fire insurance premium.
- Not to accept an insurance which they know is unenforceable at law or which they are
not registered to underwrite.
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- Not to make untrue statements during negotiations for a contract.
2.4 Definition
Is a positive duty to voluntarily disclose, accurately and fully, all facts material to the risk being proposed,
whether asked for them or not.
(a) Material fact – every circumstance is material which would influence the judgment of a prudent
insurer in fixing the premium, or determining whether he will take the risk.
(b) Facts which must be disclosed
Any fact which could influence the insurer in accepting or declining a risk, or in fixing the premium or
terms and conditions of the contract is material and must be disclosed.
The following facts must be disclosed:

1. Facts which show that the particular risk being proposed is greater because of individual, internal
factors than would be expected from its nature or class.
2. External factors, which make the risk greater than normal
3. Facts which would make the likely amount of loss greater than that normally expected
4. Previous losses and claims under the policies
5. Previous declinature or adverse terms imposed on previous proposals by other insurers
6. Facts restricting subrogation rights due to the insured relieving third parties of liabilities which
they would otherwise have
7. Existence of other non-indemnity policies such as life and accident
8. Full facts relating to and descriptions of the subject matter of insurance
Examples of facts requiring disclosure

1. Fire Insurance – the form of construction of the building and the nature of its use
2. Theft Insurance – the nature of stock and its value
3. Motor Insurance – the fact that a vehicle will be driven regularly by someone other the insured
4. Marine Insurance – in cargo insurance the fact that a particular consignment will be carried on
deck
5. Life assurance – previous medical history
6. Personal accident insurance – previous history which might make an accident more likely, the
results more severe or the recovery slower than normal.
7. In all classes of insurance – previous loss experience and all the facts the proposer could be
reasonably expected to know.
(c) Facts which need not be disclosed
The following facts need not be disclosed:
1. Facts of law – everyone is deemed to know the law
2. Facts the insurer is expected to know – facts of common knowledge e.g. processes within a
particular trade
3. Facts which lessen the risk – the existence of an intruder alarm system in a theft risk
4. Facts which the insurer has been put on enquiry e.g. where proposer has referred the insurer to a
claims record under a previous policy with a previous insurer and the insurer does not request
information from the previous insurer. The insurer is assumed to have waived his right to the full
information.
5. Facts which the insurer’s survey should have noted – material facts which are visible or which a
reasonable surveyor would enquire about.
6. Facts covered by policy conditions – facts which are subject to any express of implied warranty
e.g. maintenance of an insured vehicle in roadworthy condition.
7. Facts which the proposal does not know
8. Facts on spent convictions
2.5 Duration of the duty of disclosure
Duration of the duty to disclose material facts vary with the circumstances:
(a) Common Law
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 At common law the duty starts at the inception of negotiations for a contract and terminated when
the contract is formed. There is no duty to disclose changes while the contract is running.
(b) Contractual duty
The conditions of a policy may extend the common law position by requiring full disclosure during the
currency of the policy and allowing the insurer to underwrite the change.
(c) Position at renewal
Position varies as follows:
Long-term business – no duty operates at renewal. Insurer is obliged to accept the premium.
Other business – original duty of disclosure is revived at renewal.
(d) Alterations of the contract
Any policy changes to terms of contract revive the duty of disclosure e.g. in increasing the sum
assured or revival of a lapsed policy.
2.6 Breach of the doctrine of utmost good faith
The aggrieved party has the following options at his disposal:
- Avoid the contract by repudiating it ab initio or refusal of liability for an individual claim.
- To sue for damages if concealment or fraudulent misrepresentation is involved.
- To waive these rights and allow the contract to carry on unhindered.
2.7 Compulsory Insurances
Certain insurances e.g. motor insurance for third party liabilities are required by statute to ensure that
insurance money to meet third party injury or property damage claims will be available.
The RTA Act Chapter 13:11 prohibits insurers from avoiding liability on the grounds of certain breaches of
utmost good faith. However, insurers endorse their policies to the effect that amounts paid on claims
which would not have been paid in the absence of statutory limitations may be recovered from the
insured.

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