OCEANIA IS A COMPANY THAT PROCESSES SEAFOOD.

ITS PROCESSING PLANT IS IN A LEASED

PREMISES LOCATED IN MUMBAI WITH STOCKS WORTH RS. 5 LACS. A SUPER CYCLONE
COUPLED WITH HEAVY RAINS HIT THE AREA IN MIDNIGHT DUE TO WHICH THE ELECTRIC
SUPPLY WAS DISRUPTED AND STOPPED. DUE TO FAILURE OF ELECTRIC SUPPLY THERE WAS
DETERIORATION OF STOCK OF PRAWNS AND OTHER FISHES TO THE DEGREE OF RS.2.65 LACS.
THE OWNER OF OCEANIA TOOK AN INSURANCE POLICY FOR THE SEAFOOD PROCESSING PLANT
AGAINST PERILS INCLUDING CYCLONE, STORMS, FIRE, ETC. BUT NOT AGAINST FAILURE OF
ELECTRIC SUPPLY OR DETERIORATION OF STOCK. HE TOOK THE INSURANCE POLICY FROM 2
DIFFERENT INSURERS FOR COVERING THE SAME RISK FOR THE SAME PERIOD OF TIME – RS.3.5
L FROM INSURANCE COMPANY “ALPHA” AND RS.5 L FROM INSURANCE COMPANY “BETA”.
ALPHA FURTHER INSURED 40% OF THE RISK WITH INSURANCE COMPANY “OMEGA”.

DRAFT A LEGAL ADVICE FOR BOTH OCEANIA AND THE INSURERS USING THE PRINCIPLES OF
INSURANCE LAW. PROVIDE ADEQUATE REFERENCES AND PRECEDENTS FOR YOUR REASONING
AND ARGUMENTS. CALCULATE THE INSURANCE AMOUNT PAYABLE BY EACH OF THE INSURERS
SHOULD OCEANIA SUCCEED IN ITS CLAIM.

LEGAL ADVICE FOR ‘OCEANIA’

Firstly, every contract of insurance needs an insurable interest to support it, otherwise it is
invalid.1 And since Oceania has an insurable interest in the subject-matter of the loss which is
the stock of sea-food, since it is a company that processes sea-food, this can be backed by the
definition of insurable interest which is universally accepted2 which defines ‘interest’ to be an
event to mean-

(i) If it taking place would be beneficial, or

(ii) If it is frustrated the party would suffer a loss

This lays emphasis on the relationship of benefit and detriment to establish whether the subject-
matter has insurable or not. Insurable interest does not only describe a statutory requirement but
it also describes the assured’s interest in the subject-matter of the loss under the policy3. And
since Oceania being a seafood processing company will very obviously detriment from the loss
of its sea-food stock, thus showing that it has an insurable interest and thus, a valid insurance
contract it can claim.

1
Srinivasan, M. (2008). Principles of insurance law. 8th ed. New Delhi: Wadhwa and Company Nagpur, p.232.
2
Lucena v Craufurd, (1806) 2 BOS & PNR 269 (HL).
3
Srinivasan, M. (2008). Principles of insurance law. 8th ed. New Delhi: Wadhwa and Company Nagpur, p.229.

1
Moreover the Indian Marine Insurance Act4 says that the interest needs to extend at the time of
taking the insurance and the interest need not last when the insurance is actually effected, which
Oceania had at the time the insurance was taken. Also, the insurable interest is not limited to
absolute ownership of property5, thus Oceania despite having its premises on lease can claim the
insurance premium.

Furthermore, the risk or the extend of protection provided by the policy, does not include6-

(i) Loss by willful misconduct

(ii) Loss caused by ordinary wear-and-tear or the inherent vice of the matter

Both the above requirements have been met by the case of Oceania since the loss caused was not
the result of any of the above but it was caused due to the Cyclone that caused the electricity
outage, which was a natural calamity.

Another important principle to consider is Causa Proxima non remota spectator or the principle
of proximate cause which can be defined as,

“Proximate cause means the active, effective cause that sets in motion a train of events which
brings about a result without the intervention of any force started and working actively from a
new and independent source”7

Another very important thing to note is that Proximate Cause has been interpreted as the cause
which is “proximate in efficiency”.8 And determining the most proximate cause is simply the
application of common-sense.9 And the most ‘effective’ cause of the electricity-disruption can be
attributed to the cyclone and the heavy rains, even if they are not the most immediate cause they
are the most ‘effective’ cause of event that caused an unbroken chain of events that led to the
loss. A policy may cover certain perils mentioned specifically therein (known as insured perils),

4
Indian Marine Insurance Act, 1963, Section 8.
5
Srinivasan, M. (2008). Principles of insurance law. 8th ed. New Delhi: Wadhwa and Company Nagpur, p.233.
6
Xantho’s case (1887) 12 App Cas 509 (HL).
7
Pawsey & Co. v Scottish Union and National Insurance Co. (1907).
8
Leyland Shipping Co. v Norwich Union Fire Insurance, (1918) AC 101.
9
Madsen v City & Country Assurance Co., (1865) LR 1 CP 232.

2
whilst some perils may be specifically excluded (known as excepted perils) and some may still
be neither included nor excluded (known as uninsured perils).10

And here the ‘insured peril’ preceded the excepted/uninsured peril which makes the insurer
liable to pay Oceania.

And thus, Oceania is entitled to the insurance premium amount, and since it has taken a ‘Double
Insurance’ both the insurers are liable to contribute to the premium amount. The principles of
contribution incase of double insurance have been settled by Lord Mansfield. It is defined as not
being “based on contract but on what has been said to be the plainest equity that burdens should
be shared”11.

CALCULATION OF AMOUNT TO BE RECEIVED FROM BOTH INSURERS

CONTRIBUTION IN PROPORTION TO SUM ASSURED THAT IS “MAXIMUM

LIABILITY’ BASIS

Here, the amount of loss is Rs. 2,65,000/- and Insurer “Alpha” is insured with Rs, 3,50,000/- and
insurer “Beta” is insured with Rs. 5,00,000/- . Thus, the amount of loss will be divided among
both the insurers in the following ratio-

ALPHA : BETA = 7:10

Thus, dividing Rs. 2,65,000/- among Alpha & Beta in the ratio 7:10 provides that ALPHA will
contribute Rs, 1,09,117.65/- and BETA will contribute Rs. 1,55,882.35/- to the total loss amount
owed to Oceania.

CALCULATION OF RE-INSURANCE

Re-insurance is a process by which an insurer who has undertaken a liability beyond his capacity
may limit it to an amount he is prepared to assume.12 So Alpha has re-insured his excess portion
of the risk he is unable to undertake to insurer Omega which is 40% of the risk amount.

10
iEduNote.com. (2019). Proximate Cause Principle of Insurance. [online] Available at:
https://iedunote.com/proximate-cause [Accessed 2 Aug. 2019].
11
Legal and General Insurance Society v Drake Insurance Co. (1992) QB 887.
12
Srinivasan, M. (2008). Principles of insurance law. 8th ed. New Delhi: Wadhwa and Company Nagpur, p.281.

3
Thus, the ratio between ALPHA and OMEGA is 60% : 40% or 3:2. Thus, the amount ALPHA
owes to Oceania will be divided among ALPHA and OMEGA in the above ratio.

So, ALPHA owes RS. 65,470.59/- and OMEGA owes Rs. 43647.06/-.

LEGAL ADVICE FOR THE INSURERS

The principle of insurable interest states that the principle aims to protect and describe the
assured’s interest in the subject-matter, but in this case Oceania does not have the matter which
was lost as the subject-matter in the policy. With both the insurers Alpha and Beta the policy
contains the subject-matter the processing plant, but Oceania is claiming insurance for the loss of
its sea-food which is not the subject-matter of the contract.

In a similar case13 premises were insured. The said policy was one of Fire, lightening, explosion,
strike, riot and malicious damages etc. He also took another policy for burglary, house breaking
and damages caused to the house etc. Damage was caused to machinery on the premises. It was
held by the court said that, “The respondent is a lessee of the premises and he has mortgaged the
lease hold interests to the Corporation. The Corporation took the policy of insurance for the
benefit of the respondents, therefore the respondent has no insurable interest in the property and
he is not entitled to the amount insured” implying that the respondent had only a beneficiary
interest and not a legal one. Thus, the same case is seen here with Oceania as they had their
processing plant on a leased premises (which was not even the subject-matter of their policy)
they did not have any legal interest involved, which rendered them unable to pursue an insurance
contract since a legal interest is necessary for an insurance contract. They only have a beneficial
interest on behalf of which they cannot claim the insurance.

Moreover the principle of proximate cause is concerned with how the actual loss or damage
happened to insured party and whether it is a result of an insured peril. It looks for what is the
reason behind the loss, is that is an insured peril or not.14 A policy may cover certain perils
mentioned specifically therein (known as insured perils), whilst some perils may be specifically
excluded (known as excepted perils) and some may still be neither included nor excluded

13
United India Insurance Co., Ltd., v Sri Balaji Dental Laboratory, 2000 (1) ALD 189
14
Stewart, J. (2019). Proximate Cause - Insured And Excepted Perils - News Insurances. [online] News Insurances.
Available at: http://www.newsinsurances.co.uk/proximate-cause-insured-and-excepted-perils/0169495646
[Accessed 2 Aug. 2019].

4
(known as uninsured perils).15 The principle of proximate cause has been established to solve
such a cumbersome situation and to enable a claims manager to decide whether a claim is at all
payable or not and if payable, then to what extent.
The principle has been defined as16, the active, efficient cause that sets in motion a train of
events which brings about a result, without the intervention of any force started and working
actively from a new and independent source. It is the immediate cause and not the remote cause.
The consideration is what has actually brought about the result?
In a very important case17, an ordinary fire policy was given to cover a warehouse and the policy
excluded war or warlike operations etc. The warehouse was completely damaged by fire arising
out of a bomb being dropped from an enemy aircraft. The insurer repudiated the liability on the
ground that even though the warehouse was damaged by fire, the proximate cause of the damage
was a warlike operation (i.e., enemy action) and the fire was simply a remote cause. The
judgment was given in favor of the insurer maintains that the loss was proximately caused by an
enemy action which was not covered by the policy.

Thus, according to the above-mentioned principles of insurance and the accompanying case-laws
that have established the changing rules for insurance contracts, it can be very well deducted that
the insurers do not owe the insurance claim to Oceania.

15
iEduNote.com. (2019). Proximate Cause Principle of Insurance. [online] Available at:
https://iedunote.com/proximate-cause [Accessed 2 Aug. 2019].
16
Pawsey & Co. v Scottish Union and National Insurance Co. (1907).
17
Rogers v Whittaker [1917] 1 KB 942.

5
DISCUSS AND DELIBERATE ON THE PRINCIPLE OF UBERRIMA FIDES IN INSURANCE LAW. WHAT
IS THE LEGAL BASIS FOR THE DUTY OF DISCLOSURE IN INSURANCE CONTRACTS?

Risk in inherent in life, but it is of common knowledge and understanding that people like to take
steps to respond to risks and insurance is the most appropriate response in this regard.

Contract of insurance is a contract under which the insurer is legally bound to pay a sum of
money or its equivalent to the insured, upon the happening of a specified event involving some
element of uncertainty as to time or likelihood of occurrence, which affects the insured’s interest
in the subject-matter of the insurance”.18

DUTY OF DISCLOSURE OF THE PARTIES

The duty of disclosure of the parties in an insurance contract emerges from the base concept of
“Caveat Emptor” which means let the buyer beware.19 This implies that both the parties in the
contract are expected to inform the other party of all the relevant and material facts to the best
of their knowledge, the duty enforced upon by this principle is to ensure that the parties do not
enter into the contract by fraud or misrepresentation, either innocent or otherwise. A person
seeking insurance will be bound to disclose all material facts relating to the risk involved. Hence,
there must be free consent and the parties must understand the same thing in the same sense.

MATERIAL FACT

Section 20(2) of the Indian Marine Insurance Act20 states that ‘material circumstances’ are those
circumstances that would affect the judgment of an insurer in assessing the risk and fixing the
appropriate premium. It was held that all fact related non-disclosures are material non-
disclosures21. Section 20(2)22 says that the test of materiality is the “judgment of the prudent
insurer”. And not what is material in the opinion of the reasonable assured.23

18
Hasson, R. (1969). THE DOCTRINE OF UBERRIMA FIDES IN INSURANCE LAW-A CRITICAL
EVALUATION. The Modern Law Review, [online] 32(6), pp.615-637. Available at:
https://www.jstor.org/stable/1093639?read-now
19
Laidlaw v Organ, 2 Wheat 98.
20
Indian Marine Insurance Act, 1963, Section 20(2).
21
St, Paul Fire & Marine Insurance Co. (UK) Ltd. V McConnell Dowell Constructions Ltd., (1993) 2 Llyold’s Rep
503
22
Indian Marine Insurance Act, 1963, Section 20(2).
23
Mutual Life Insurance Co. v Ontario Metal Products, 94 LJPC 60

6
Section 19 of the Indian Contract Act24, makes it clear that even where the contract is brought
upon by fraud or any misrepresentation, the contract will become unavoidable if any of the
parties had the means of discovering the truth but never made any attempts to do so. Each party
is expected to inform himself of the relevant facts by making such independent enquiries as he
may think prudent by their nature, they are or might be equally accessible to both the parties. 25

DURATION OF DUTY OF DISCLOSURE

Section 20(1) of the Indian Marine Insurance Act says that the duty continues throughout the
period of negotiations up until the time the contract is concluded.26 And after the contract is
concluded there is no duty to inform the insurer about the changes taking place in the nature of
the risk, unless specifically mentioned in the said contract.27

“UBERRIMA FIDES” : PRINCIPLE OF UTMOST GOOD FAITH

Principle of Uberrimae fidei or, the Principle of Utmost Good Faith, is a very basic and first
primary principle of insurance. According to this principle, the insurance contract must be signed
by both parties in an absolute good faith or belief or trust. The person getting insured must
willingly disclose and surrender to the insurer his complete true information regarding the
subject matter of insurance. The insurer's liability gets void if any facts, about the subject matter
of insurance are either omitted, hidden, falsified, distorted or presented in a wrong manner by the
insured.

An application of this principle in insurance law signifies that an applicant for a contract is under
a duty to disclose to the insurer prior to conclusion of the contract all the material facts within his
knowledge which insurer is not deemed to know.

ORIGIN OF PRINCIPLE OF GOOD FAITH

The common law doctrine of “good faith” in insurance contracts was originated in the 18th
Century. Lord Mansfield is credited with first articulating this concept in Carter v Boehm.28 Here

24
Indian Contract Act, 1872, Section 19.
25
Srinivasan, M. (2008). Principles of insurance law. 8th ed. New Delhi: Wadhwa and Company Nagpur, p.211.
26
Indian Marine Insurance Act, 1963, Section 20(1).
27
Ratan Lal Metropolitan Ins. Co., AIR 1959 Pat 413.
28
(1766) 3 Burr 1905.

7
a policy was effected against the loss of Fort Marlborough by its being captured by a foreign
enemy, the policy was for the benefit of the Governor of the fort. The defendant denied that
underwriters were liable to indemnify the insured because of a fraud, as a result of the
concealment of circumstances– particularly, the weakness of the fort, and the probability of it
being attacked by the French. It was generally observed that the concealment should not have
been done by the plaintiff, and he should have been disclosed everything which mattered in that
insurance policy. It was here that Lord Mansfield said that,

“Insurance is a contract upon speculation, the special facts upon which the contingency chance
is to be computed, lie most commonly in the knowledge of the insured only, the under-writers
trust to his representation, and proceeds upon the confidence that he does not keep any
circumstance in his knowledge, to mislead the under-writer into a belief that the circumstance
does not exist, and to induce his to estimate the risqué as if it did not exsist” 29

It is the fundamental principle of insurance of utmost good faith which forbids non-disclosure of
what one knows to draw the other into a bargain from his ignorance and of his believing the
contrary. And just as the insured has a duty to disclose is the duty of the insurers and their agents
to disclose all material facts within their knowledge since the principle applies to both parties
equally.30

UBERRIMA-FIDES OVER THE YEARS

It was held by the House of Lords that the exception in the insurance contract under which the
insurers were not to be liable for any claims caused directly or indirectly by fraud did not extend
to the fraud by the bank’s own brokers but referred to only fraud by the borrower.31

In another very distinct case the issue revolved around, concerned the ambit of the insurer’s duty
of disclosure to the assured assignee, with the question being that did they owe a duty of good
faith to the assignee requiring them to make disclosures of their defense. It was held that the
assignee was not the assured and thus could not owe any duty of good faith to the insurers and

29
Carter Boehm, (1766) 3 Burr 1905.
30
United India Insurance Co. Ltd. V MKJ Corp., (1998) 92 Comp Cases 331 (333).
31
Banque Finaciere de la Cite v Westgate Insurance Co. Ltd., (1989) 2 All ER 982.

8
thus the principle of reciprocity demanded that the insurers themselves were similarly exempt
from such a duty.32

LEGAL BASIS OF THE DUTY OF DISCLOSURE

“The duty of utmost good faith is not contractual in nature, but derives from the rule of law.”

The principle of utmost good faith imposes meaningful reciprocal duties owed by both the
parties to each other. But these duties cease to exist as soon as the contract is made.33This shows
that the duty does not arise of out the contract, thus this duty is neither contractual, nor tortious
statutory but is founded on the jurisdiction originally exercised by the Courts of equity to prevent
impositions.34

The Indian Contract Act35 provides that mere silence does not amount to fraud unless there is a
duty to speak or silence amounts to speech, this duty is explained as a legal duty not merely a
moral duty. The Act36 also gives the party defrauded an option to enforce the performance of the
promise made by the defrauding party or to claim damages for breach of contract.

It was held by the court that duty to disclose is not based upon an implied term in the contract at
all, it arises from outside the contract.37

The legal basis of the duty of disclosue can be well explained by quoting the following,

“there are certain contracts expressed by law to be contracts of utmost good faith where
material facts must be disclosed , if not the contract is voidable. In such cases the duty does not
arise out of the contact, but the duty of the person proposing an insurance arises before the
contract is made..”38

32
Bank of Nova Scotia v Hellenic Mutual War Risks Association (Bermuda) Ltd., (1989) 3 All ER 628.
33
Indian Marine Insurance Act, 1963, Section 20(2).
34
Banque Finaciere de la Cite v Westgate Insurance Co. Ltd., (1989) 2 All ER 982.
35
Indian Contract Act, 1872, Section 17.
36
Indian Contract Act, 1872, Section 19.
37
March Cabaret Club and Casino Ltd. V London Assurance, [1975] 1 Lloyd's Rep. 169.
38
Bell v Lever Bros. Ltd., (1931) All ER Rep (1 st) 32.

9
EQUAL DUTY OF DISCLOSURE OF BOTH INSURER AND INSURED

The duty to show good faith falls on both the parties in an equal degree in all types if insurance
contracts.39 While the duty of the insured is laid down very distinctly in Section 20 & 2140, the
duties of the insured regarding the same are not very defined in the Act. But it was laid down that
the insurer must at least extend to disclosing all facts known to him which are (a) material to the
nature of risk, or (b) recoverability of the claim under the policy which a prudent insured would
take into account in deciding to cover the risk.41It has also been held that the insurer must inform
the insured about the terms and conditions of the policy that is going to be issued to him and
must strictly conform to the statements made in the prospectus or made by him or his agents. 42

39
Anstey v British Natural Premium Life, (1908) 99 LT 765.
40
Indian Marine Insurance Act, 1963.
41
Banque Finaciere de la Cite v Westgate Insurance Co. Ltd., (1989) 2 All ER 982.
42
Anstey v British Natural Premium Life, (1908) 99 LT 765.

10
 BIBLIOGRAPGY

I. BOOKS

i. Srinivasan, M. (2008). Principles of insurance law. 8th ed. New Delhi:

Wadhwa and Company Nagpur,

ii. K S N Murthy K V S Sarma (1991). Modern Law of Insurance in India. 5th ed.

Lexis Nexis.

II. JOURNALS AND ARTICLES

i. Hasson, R. (1969). THE DOCTRINE OF UBERRIMA FIDES IN INSURANCE

LAW-A CRITICAL EVALUATION. The Modern Law Review.

ii. Shamsi Ubale Jibril L.L.B, B.L, Ishaq Abubakar Baba L.L.B, B.L and

Abdulkarim Kabiru Maude L.L.B, B.L (2017), CRITICAL ANALYSIS OF

FUNDAMENTAL PRINCIPLES OF INSURANCE, International Journal of

Advanced Academic Research | Arts, Humanities and Education Vol. 4, Issue

7 (July 2018).

iii. Klein, R. (2011). Principles for Insurance Regulation: An Evaluation of

Current Practices and Potential Reforms. The Geneva Papers on Risk and

Insurance - Issues and Practice, [online] 37(1), pp.175-199. Available at:

https://link.springer.com/article/10.1057/gpp.2011.9.

III. WEBSITES

i. Lawteacher.net. (2019). The Six Principles in Insurance. [online] Available at:

https://www.lawteacher.net/free-law-essays/commercial-law/the-six-

principles-in-insurance-commercial-law-essay.php [Accessed 2 Aug. 2019].

ii. Akrani, G. (2019). Principles of Insurance - 7 Basic General Insurance

Principles. [online] Kalyan-city.blogspot.com. Available at: https://kalyan-

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 city.blogspot.com/2011/03/principles-of-insurance-7-basic-general.html

[Accessed 2 Aug. 2019].

iii. Firm, M. (2019). 7 Principles | Insurance Contracts | McMinn Law Firm |

Austin. [online] McMinn Law Firm. Available at:

https://www.mcminnlaw.com/principles-of-insurance-contracts/ [Accessed 2

Aug. 2019].

iv. Findlaw. (2019). Principles of Insurance - FindLaw. [online] Available at:

https://consumer.findlaw.com/insurance/principles-of-insurance.html

[Accessed 2 Aug. 2019].

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