BM054-3.

5-2-CMLAW (Commercial Law) Business Protection: Insurance

LEARNING OUTCOME
At the end of this lesson, you should be able to:-
 Outline the dynamics of insurance as a device for risk-management
 Discuss and explain the legal principles in insurance, namely:-
(1) Indemnity
(2) Contribution
(3) Subrogation
 Discuss and briefly explain the rights and duties of the parties in an insurance contract

INTRODUCTION TO INSURANCE
A tool for managing risk, even though the law of insurance is derived from contract, the need for
insurance is rooted in reality. Few activities in today’s overly litigious world are not in one way or
another involved with insurance. Contracts of insurance may concern us from the moment of our birth
to the moment of our death and most everything in between.

Insurance is more important than ever because it appears that new risks never even fathomed by our
forefathers emerge every day. One very real and unfortunate truth of conducting one’s personal and
business affairs is that financial safety nets are more necessary than ever.

Insurance policies offer protection against economic loss, that is, loss or damage that can be measured in
purely financial terms and compensated by money. For example, an insurance policy can pay for the
cost to repair or replace a damaged automobile or to rebuild a building damaged by fire, for the cost of
medical treatment for an injury or illness or for the lost income of a person who dies or is unable to
work. The purpose is to place the injured party, as nearly as possible, in the same financial position as if
the loss had not occurred.

It is important to understand this limitation of insurance, since there are many types of losses which
cannot be compensated by money. For example, insurance cannot replace a life or take away the
emotional injury or pain, which often accompanies an accident or serious illness, or compensate for loss
of the "sentimental" value of an item of property. When you buy homeowners property insurance, for
example, you are insuring only the economic value of the home, i.e., the cost to repair or rebuild it.
Whatever the case, the role of insurance is more vital than ever.

THE BUSINESS SENSE OF INSURANCE

Workers compensation coverage

Businesses are normally required to provide this coverage for the benefit of insuring their employees
who may be injured while on the job. For most businesses, this requirement is satisfied by purchasing
from an agency of the government a national insurance scheme (e.g. Malaysia’s SOCSO) or from
private insurance companies in most states.

Contractual requirements
Often there will be contractual requirements for businesses to have certain types of insurance. The
following situations come to mind:
1) The terms of a lease for an office or store or factory usually will require the tenant to have certain
types of insurance to cover its operations conducted on the leased premises.
2) If a business borrows money, the loan documents often will require that a specified amount of
insurance must be maintained to cover the business's property and liability exposures.
3) Leases for office equipment may require insurance to cover potential damage to the equipment. All
contracts and leases entered into by a business should be carefully reviewed for insurance

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requirements. Failure to maintain the required insurance could be a basis for termination of the
contract or lease.

Contact with Public

Because of frequent contact with the public and because of the specialized work done by many
businesses, there is usually a much greater exposure to legal liability arising from the conduct of a
business compared with the potential for legal liability from personal activities.

It is therefore advisable for most businesses to purchase liability insurance to cover all business related
activities, and this insurance should be specifically tailored to the type of business being conducted.
This is especially important for professionals, such as health care workers, architects and engineers, who
face a greater level of potential legal liability (often called "malpractice") because of the highly
specialized and technical nature of their work. In some profession, professional indemnity insurance
may be a pre-condition of getting the license to practice the profession.

WHAT IS INSURANCE?

Definition

A contractual arrangement whereby one undertakes to indemnify another against loss, damage, or
liability as a result of specified events.
Insurance contracts are generally contracts of indemnity. In case of a loss against which the policy has
been made, the insured is entitled to be indemnified that is, he can recover the actual loss suffered). In
short, the protection against contingencies is the main purpose of the insurance.

True nature of insurance

Insurance contracts depend upon chance.

“Chance” refers to an uncertain event or a contingency as to both profit and loss happening.

Chance also implies that the each party takes a risk:

1) The insurer of being compelled to indemnify the insured upon occurrence of the insured
contingency,
2) The insured compelled to pay the premium without receiving any benefit from the insurance.

Of course, the insurer uses actuarial and statistical devices to minimize the risk.

COMMON ELEMENTS OF THE INSURANCE CONTRACTS

Written contract of indemnity between the insured and the insurer agreeing to undertake risk of loss
provided premium is paid as agreed.

The following terms/elements are relevant:

1) Insured - The party who pays a premium to a particular insurance company for insurance coverage
2) Insurer - The insurance company that underwrites the insurance coverage
3) Premium - The money paid to the insurance company

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INSURANCE FROM A CONTRACTUAL PERSPECTIVE

Agreement
A contract of insurance, like any other contract, is concluded by the acceptance of an offer. An insurer
usually invites the public to do business through intermediaries.

Legality and Capacity

These intermediaries (i.e. agents and brokers) provide the prospective insured with a proposal form,
which he completes and returns to the insurer. In the proposal form the proposer gives particulars to the
insurer of the risk that the proposer wishes him the insurer to undertake. For this reason the proposal
form contains questions about the risk. This would include the identity of the life assured, his or her
state of health, habits, family history, occupation etc.

At law, a minor cannot enter into a legal contract. However, so long as the contract is for the benefit of
the minor himself, such contract is valid. Contracts entered with person of unsound mind or with an
alien are illegal.

The proposal usually contains a warranty clause or a declaration that the answers in the proposal will
form the basis of the contract. The acceptance of the offer by the insurer results in the contract of
insurance coming into existence.

Should the insurer accept the offer subject to a health loading, this amount to a counter offer that would
have to be accepted by the insured before a contract comes into being.

The terms of an insurance contract are contained not only in the policy document (policy) but also in the
application form (proposal). The insurance company employs a standard form contract drawn up which
contains the terms and conditions of the contract and the insured thus have no choice but to accept the
contract as offered by the insurer.

Policy

The insurance policy is the document of insurance containing the insurance contract.
The insurance policy must always be written/printed form. A more important point is for the policy to be
distinguished from other documents in the transaction, namely the proposal and the cover note.

Proposal

A fact-finding (pre-contract) document that forms the basis of the insurance contract

The purpose of the proposal is to elicit from the applicant all information essential to the insurer’s
assessment of risk and the premium. This form will usually request for details of past losses or claims,
any previous refusals to insure, obvious matters such as address, occupation, age, details of the
particular risk, medical history. For the proposal to be the basis of the insurance contract, that proposal
must be expressly incorporated in the insurance policy, usually by adopting a clause in the recital
(preamble) of the policy.

Cover note

Interim contract of insurance that provides cover for a stated period.

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Quite often, the insurer may not actually issue a policy until some weeks after the completion of the
proposal form and its acceptance.

Illustration: A person buying a car needs immediate insurance cover before driving on the road. To
obtain this, the purchaser will take out a cover note.

BASIC CONCEPTS OF INSURANCE LAW: INSURABLE INTEREST

The financial interest a person has in the subject matter that is being insured

A person has an "insurable interest" in something when loss or damage to it would cause that person to
suffer a financial or other losses (e.g. in something that you own or which is in your possession). In
short-term assurance, this is usually the financial interest that the person has in an asset, like a motor
vehicle. If the vehicle had to be stolen, the insured would suffer a financial loss. In the case of long-term
insurance or life assurance, the insurable interest is in a person’s life, health or well-being.

Illustration: If the house you own is damaged by fire, the value of your house has been reduced, and
whether you pay to have the house rebuilt or sell it at a reduced price, you have suffered a financial loss
resulting from the fire. By contrast if your neighbor's house (which you do not own) is damaged by fire,
you may feel sympathy for your neighbor and you may be emotionally upset, but you have not suffered
a financial loss from the fire. You have an insurable interest in your own house, but you do not have an
insurable interest in your neighbor's house.

Application of this principle is seen in the following:

1) In dealing with life insurance, an "insurable interest" generally means a substantial interest
engendered by love and affection in the case of persons related by blood, and a lawful and
substantial economic interest in the continued life of the insured in other cases. People are always
considered to have an insurable interest in their own lives, and generally also have an insurable
interest in the lives of their spouses and dependents. Business partners may have an insurable
interest in each other, and a corporation may have an insurable interest in its employees' lives,
particularly key employees.

2) For property and casualty insurance, the insurable interest must exist both at the time the insurance
is purchased and at the time a loss occurs. For life insurance, the insurable interest only needs to
exist at the time the policy is purchased.

Rationale of insurable interest: “Can I buy a policy on someone else's life?”

The reason for this is one of public policy. People should be discouraged from gambling or wagering on
lives in which they have no interest, as this is a practice that could serve as an inducement to murder.

Illustration: To prevent people from taking out a life insurance policy on the life of a stranger and then
killing them to get the life insurance proceeds, or having life insurance become a gambling device e.g.
“I’ll pay you $500 now and if O.J. Simpson dies in the next two years you'll pay me $25,000" where the
persons purchasing a policy must have an "insurable interest" in the life of the person being insured.

Points about Insurable interest to consider

“Insurable interest” is a financial interest capable of being valued in monetary terms.

The person effecting the insurance, must show that he would suffer financially by the death of the life
insured or destruction of interest and, in order to establish this, he is required to show the loss of a legal

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right which results in a financial loss. From a strictly legal point of view, a person may recover only up
to the value of his interest, being the amount of the loss. However, this does not apply to life insurance
where it is anomalous as the insurer undertakes merely to pay an agreed amount and not an indemnity.
Public policy, however, intervenes and limits the amount that may be agreed upon and which may be
recovered. Nevertheless, in practice many life policies are concluded and paid where the value of the
interest concerned is not easily and precisely determined.

The insurable interest must exist at the time the policy is effected.

The continued existence of an insurable interest is not required, and there is no requirement that an
interest must exist at the death of the life assured.

This is different when it concerns property. The owner of a property has absolute insurable interest.
When a person insures a property, what is insured therein, is his interest in that property. By this
principle, insurance interest exists to other parties like lessor, lessee, financiers, etc., but their interest is
limited to the extent of their financial commitment only. The insurable interest must exist both at the
time of the proposal and at the time of claims.

In the case of marine insurance contracts, which are assignable without the consent of the insurers,
insurable interest must exist at the time of loss only.

Illustration: A creditor who has insured his debtor's life may, on the latter's death; recover the full
amount of the policy proceeds, even though the debt has already been repaid. Similarly a partner may
recover the full amount of the policy proceeds under a policy owned by him on an ex-partner's life, and
an ex-spouse may recover in similar vein.

There is no limit to insuring life or property

A person has an unlimited insurable interest in his own life or property and can therefore insure these as
many times and for as much as he can afford. This is the case even where a person insures his own life
solely for the benefit of others. However, the catch will be seen in the amount to be claimed from the
insurance company.

Examples of an insurable interest

A creditor has an insurable interest in the life of his debtor.

In general, any contractual relationship where one person has a real expectation of deriving some benefit
from another’s continuance of life will support a contract of insurance. Insurance is allowed at least to
the amount of the debt with interest thereon at the time of affecting the insurance, though the limit may
or may be defined.

In a partnership, one partner has an insurable interest in the life of another partner.

The same would apply to members of a close corporation and shareholders in a company. This assumes
that they have agreed to a buy-and-sell arrangement upon the death of a partner, co-shareholder or
member. The insurable interest arises from the obligations created in the contract to buy the deceased’s
interest. The courts have accepted that a person has an insurable interest in the life of his partner even
without the contractual obligation.

A company has an insurable interest in the life of its directors and an employer has an insurable interest
in the life of an employee

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This is provided where its prosperity depends on his services and skill and where his death would cause
it financial loss. The extent of the insurable interest will depend on the function performed by the
director/employee, the particular skills they posses and the financial loss that their death would cause.

INSURABLE INTEREST: THE DUTY TO DISCLOSE

Basis of duty: Utmost good faith (uberrimae fidei)

Insurance contracts require each party to the proposed contract to be legally obliged to reveal to the
other all information which would influence the other's decision to enter into the contract, whether such
information is requested or not.

The high standard of full and frank disclosure must be met; otherwise it will result in the contract being
voidable. Unlike ordinary commercial contracts, the contracting parties are not required to reveal all
they know about the proposed agreement. With the exception of certain protections available to
purchasers, the primary common law principle applicable to most commercial contracts is ‘let the buyer
beware’ (caveat emptor).

For example, in contracts of sale, although the seller must not misrepresent the article for sale or deceive
the buyer, he is not obliged to point out all its defects and disadvantages. The onus is on the buyer to
satisfy himself that the contract is a reasonable one and thus he has no legal redress later.

Insurance contracts, on the other hand, are based upon mutual trust between the insurer and the insured.
It is not possible for the doctrine of caveat emptor to apply due to the fiduciary nature of insurance. The
information necessary for the parties to assess the contract adequately cannot be ascertained as with
other commercial contracts. Most laws therefore require the standard of utmost good faith to apply to
insurance contracts.

Recent trends in court decisions have questioned whether the requirement of utmost good faith is in fact
a distinct requirement of our law in the case of an insurance contract. It seems that failure to disclose
material facts may well simply be a misrepresentation as in the law of contract (see below).

Consensus Ad Idem (meeting of the minds)

The party with the utmost knowledge should reveal all.

In Insurance contracts, only one party- the proposer, knows the details of the risk. He has a duty to
disclose particularly, material facts and the same should be understood by the other party to the contract
- the insurers.

In other words, each party should understand what is proposed for insurance and the same should be
covered by the insurance contract. As the insurers issue the contract document, any ambiguity in the
contract wording will be read against the insurers as they have drafted the contract.

Material facts

A material fact is the information, which acts as a criterion for acceptance of insurance contract and the
price at which to do so.

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Utmost good faith should be observed on matters relating to material facts. Most of the time, the
emphasis is on the insured’s duty to reveal truthfully and accurately the information concerned. The
insured who fails to disclose material facts may not have the policy avoided.

What constitutes “material fact” depends upon the case itself, for example:-
1) Although the age of the insured is a material fact, a policy is not avoided by reason only of a
misstatement of the age of the life insured.
2) For unexpected facts, there is no duty on the insured to disclose facts that he does not know or facts
that he cannot reasonably be expected to know.
Again, the spectre of the “basis clause” lurks to cloud the situation most of the time. There is nothing
much to prevent the harshness of this clause other that the requirement for the proposal form to
prominently display a warning that if there is any failure of disclosure of facts the insurer would not be
liable under the policy.

Insurers’ duty of good faith

The insurers, who issue the contract document, have the same duty to observe good faith while issuing
the policy and should ensure that there is no ambiguity in the contract wording.

The law recognizes that insurance policies are complex and were prepared by insurance companies
which obviously have a stronger bargaining position compared to their insured.

For this reason, the courts have developed certain "rules of construction" for reading insurance policies,
which tend to favor the interests of the insured. If there is more than one reasonable way to interpret a
certain policy provision, the courts will favor an interpretation that supports coverage under the policy
rather than an interpretation that would support denial of coverage. If there is more than one reasonable
way to read coverage exclusion, the courts will tend to favor the narrowest interpretation of the
exclusionary language.

BASIC CONCEPTS OF INSURANCE LAW: PRINCIPLES

Principle of Indemnity
The insured person is placed, financially, in the same position as he was before the loss.
If you suffer a loss under an insurance policy, you are entitled to recover the actual amount of your loss -
no more and no less- up to the amount insured by the policy and subject to any deductible or
depreciation, if applicable.

Principle of Contribution

Where two or more policies cover the same subject matter against the same perils (risk), then each
insurer pays its proportion of the total loss
The principle of contribution is a corollary to the principle of indemnity. If an insured obtains more than
one policy covering the same risk, he cannot recover the same loss from more than one source so that
the insured does not benefit in excess of ‘Indemnity’. Contribution checks that each policy pays only a
rateable portion under each separate policy.

The rationale behind this is the fact that the law does not permit you to make a profit as the result of the
loss. Thus, in the case of fire insurance, if you insure your house with two companies, each policy
covering the full value, then, in the event of a loss, total or partial, each insurance company would pay
you one-half of the loss.

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Notice however, that it is not the insurance company that doesn't want to pay you; it is the law that says
the company is not allowed to pay you. Thus, if you insured your house twice over, intending to set fire
to it and make a handsome profit, you would not be entitled to any return of premium because of the
duplication.

Exception to rule of indemnity

Health and accident policies

The reason the Principle of Indemnity does not apply as a general rule with health insurance policies or
plans is because when a policyholder is injured or suffers a disease, it is impossible to say exactly in
dollars and cents what is his actual loss.

If an insurance company wishes to apply the Principle of Indemnity in an Accident or Health policy, it
must be included in the wording of the policy.

Illustration: A businessman could continue his job after the loss of an arm much more easily than, say, a
pianist or a manual worker, and therefore the loss of income would be different in each case.

Life policies

You can hold as many life policies as you can afford and all of them will pay the sum insured at the
specified time.

Principle of Subrogation
The legal right of one person, having indemnified the other in a contractual obligation to do so, to stand
in the place of another and avail of all the rights and remedies of the another, whether enforced or not.

This is another corollary to the principle of Indemnity. A loss may occur accidentally or by the action or
negligence of third party (not workmen).

The property owners have a right to proceed against the offending third party to recover the loss/damage
and also under their insurance policy but not under both.

If the insured opts to recover the loss under the insurance policy, which is faster and does not involve
litigation, he will surrender his rights against the third parties in favour of the Insurer signing a ‘Letter
of Subrogation’.

The exception to this is life insurance polices wherein insured/ beneficiaries can claim under an
insurance policy and also proceed against the offending third party.

Agreed value policies

The value of the thing insured, and also the amount to be paid thereon in the event of loss, is settled by
agreement between the parties and inserted in the policy

Sometimes the insured may not be in a position to determine the exact value of the property to be
insured. The reasons for this may be various: -

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1) A piece of jewellery or a vintage car which value may be much more than the monetary value of the
property.
2) In the case of marine insurance, with exchange fluctuations and the time taken for transit, the value
of the property carried on board the ship may also vary.

Under such circumstances both insured and the insurer agree for a basis of valuation which may be
more or sometimes less than the actual value of the property. Valued policies are also commonly
employed where the subject of the insurance is life and death.

The relationship between valued contracts and the principle of indemnity and its corollary are stated as
follows:-
1) Valued contracts are contracts of indemnity but by a special application of the principle itself.
2) The principle of subrogation is not available for valued policies. The case cited constantly is the
American case in Florida that held that subrogation would not lie because the measure of payment is
by stipulation rather than actual loss assessment or in the nature of an investment ( DeCespedes v.
Prudence Mutual Casualty Co., 193 So. 2d 224 (Fla. 3d DCA 1966).

CLAUSES IN THE INSURANCE POLICY

Basis clause

Statement specifying that the information provided is correct and will form the basis of the contract
between the insurer and the insured.

Although often appearing in the policy, this clause is usually printed at the foot at the proposal.

The clause incorporates the terms of the proposal into the policy, making the information in the proposal
become the foundation of the contract. A typical clause may read like this: “ I do hereby declare and
warrant that that the answers given here are in every respect true and correct, and I have not withheld
any information likely to affect acceptance of this proposal. I agree that the proposal will be the basis of
the contract …..”

The consequence here is that any inaccuracy, however trivial or immaterial to the risk, will entitle the
insurer to avoid the contract and thus not pay a claim.

Exclusion clause

Statement describing a condition or type of loss that is not covered by the policy.

This clause is an exception to the general statement of coverage contained in the policy.

Illustration: A car accident policy typically states that damages will be paid for bodily injury or property
damage for which an insured becomes legally responsible because of a car accident. The same policy
typically would have "exclusions" that provide e.g. that there is no coverage for intentional injury or if
the injury is caused by a person who uses an insured vehicle without permission.

Limitation clause

Statement which describes a condition or type of loss that is not covered by the policy but is applicable
only under certain circumstances or for a specified period of time.

This provision is similar to an exclusion clause.

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Illustration: A health insurance policy often contains a "pre-existing condition" limitation, which states
that the coverage does not apply to an illness or other medical condition that has been treated or
diagnosed within a certain period of time (e.g. six months) prior to the beginning of the policy.
However, after the policy has been in effect for a specified period of time (often six months to one year),
the limitation will no longer apply and subsequent treatment for the preexisting illness or condition will
be covered.

NOTE: Since exclusions and limitations "take away" some of the coverage of the policy, the law
requires that they be clearly written and very specific. In the event of a reasonable difference of opinion
over how to interpret the meaning of an exclusion or limitation, a court generally will resolve the
dispute in favor of the policyholder by adopting the narrowest or most restrictive interpretation.

Deductible clause
Clause in an insurance policy that provides that insurance proceeds are payable only after the insured
has paid a certain amount of the loss.

BASIC CONCEPTS OF INSURANCE LAW

INSURABLE INTEREST: MISREPRESENTATION

Effect of a misrepresentation
Where one party has been induced to enter into the contract of insurance, the other party may elect to
rescind the contract from the beginning.

The effect of a misrepresentation has to some extent been compromised by the existence of the ‘basis
clause’ (above) that provides better and immediate, “no-questions-asked” right of the insurer to avoid
the contract.

WHAT AM I REQUIRED TO DO WHEN I HAVE A CLAIM?

Every insurance policy specifies certain duties that an insured must perform after a loss has occurred.
The exact duties vary among different policies and will be different for property damage claims than for
liability claims. These duties are usually included in the section of the insurance policy entitled
"Conditions," since failure by the insured to perform one or more of these duties could relieve the
insurance company of its obligation to pay the claim -- i.e., the insured's duties are a contractual
"condition" of the insurance company's obligation to perform its duties under the policy.

Give prompt notice

Policies usually require an insured to give "prompt notice" of any loss, including basic information
about what property was damaged or the time and place of an accident or injury.
1) If there has been property damage, the insured will be obligated to take reasonable steps to protect
the property from further damage.
2) If there is a loss by reason of theft, policies often require that the police must be notified.
3) In the event of a liability claim, you must promptly send the insurance company copies of any
notices or other legal papers you receive.
4) For a claim under a life insurance policy, you may be required to provide a copy of the death
certificate for the insured person.
5) Almost all property and liability policies contain a general requirement that the insured must
cooperate with the insurance company in the investigation, settlement or defense of the claim.

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CLAIM SETTLEMENT

Duty of the Insurer

(1) All insurance policies contain an implied obligation applicable to the insurance
company of "good faith and fair dealing" towards its insured.

When a claim is presented, there is an implied obligation that an insurance company cannot simply look
for reasons not to pay. Instead, the company must make a thorough investigation of the claim, must
consider all reasons and circumstances that might support the claim, and must give as much
consideration to the financial interest of the insured as it gives to its own financial interest.

(2) When you buy liability insurance, part of the insurance company's obligation is to
provide a defense for you if you are sued

The insurance company will do this by hiring and paying for an experienced lawyer to represent you in
court. Even though the insurance company selects the lawyer and must approve the payment of all legal
fees and other expenses of the lawsuit, the lawyer represents you.

Under most types of liability insurance, the insurance company has the contractual right to settle or
defend the case as it sees fit. The insured normally will have an opportunity to provide input, but the
company typically has no obligation to get the insured’s consent or approval. A common exception to
this involves professional liability policies, such as medical malpractice or architects errors and
omissions coverage, under which consent of the insured usually is required for any settlement.

Note however the following: The insurance company is obligated to provide a defense for the insured if
any of the claims could be covered, but the company may not be obligated to pay damages for certain
types of claims. Following from this, a "Reservation of Rights" letter from the insurer is a notice that
even though the company is proceeding to handle your claim, depending on what happens, certain
losses might not be covered by the terms of the policy. By such a letter, the company preserves or
"reserves" its right to deny coverage at a later date based on the terms of the policy.

Illustration: Liability policies typically do not provide coverage for damages caused intentionally. If you
injure someone under circumstances where the injury could have been accidental or could have been
intentional, the legal complaint might allege both that your action was "negligent" and that your action
was "intentional." In court, the party suing you will have to prove it was one or the other. In such a case,
your insurance company may write a letter (i.e. Reservation of Rights) saying it will provide you a
defense but it will not pay damages if the court finds you caused the injury intentionally.

Lawsuit for breach of contract

If the insurance company fails or refuses to pay a claim which should be paid or offers to settle a claim
for less than it knows the claim is worth or denies a claim without adequate investigation under the
terms of the policy, it is in breach of the contract, and the insured can pursue all available legal remedies
for the breach.

This situation could give rise to a so-called "bad faith" claim against the insurance company, i.e., a claim
that the company has breached its implied obligation of good faith and fair dealing.

It usually involves filing a lawsuit against the insurance company. If successful, the insured is entitled to
all damages resulting from that action, including certain types of damages that would not be available
just for breach of contract. The insured will be able to recover its damages, which at least will equal the

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amount the insurer should have paid under the terms of the policy and may also include other expenses
that were incurred because of the breach as well as costs of the lawsuit. In cases of extreme or
outrageous misconduct by an insurance company, the insured also may be entitled to receive punitive
damages.

CLAIM DISPUTES
Dispute as to Quantum

When liability under the policy is admitted but the quantum is disputed, the insured cannot rush to a
Court of law without first referring the dispute to Arbitration.

Arbitration is the usual way of settling claim disputes. In keeping with this, the insured may appoint an
arbitrator to be followed by appointment of another arbitrator by the insurers. Otherwise, they can
appoint a single arbitrator, to represent both of them. If the two separate arbitrators cannot reach an
agreement, both the arbitrators can appoint a third arbitrator (called the ‘umpire’).

The award of the Arbitrators is binding on both the parties to the dispute and cannot be challenged
unless a point of law is involved.

In some situations where foreign funding is involved, the financiers who are also joined in the policy as
co-insured, may insist upon conducting the Arbitration proceedings in their own country. In such a case,
the insurers may agree to modify the arbitration condition suitably.

TERMINATION OF POLICY
Cancellation by the Insured

As a general rule, a policyholder may elect to cancel an insurance policy at any time by giving notice to
the insurance company.
In some cases you may be required to return the original policy or sign a "policy release", and of course
you will be responsible for any premium earned through the date of cancellation.

Sometimes there are financial penalties for early cancellation by the policyholder. A policy must clearly
describe any applicable cancellation penalties or surrender charges.

Most property and liability policies require what is called a "short-rate" penalty when a policyholder
requests cancellation, which means that the company retains a disproportionate amount of the premium.
For example, if you have a one-year policy and you request cancellation after six months, the "short-
rate" penalty would allow the company to retain more than one-half of the annual premium. Also, many
types of life insurance policies and annuities impose "surrender charges" if they are canceled before they
have been in effect a certain number of years.

Cancellation by the Insurer for non-payment of premium

For property and liability insurance, a cancellation notice usually must be sent to the policyholder
several days prior to the effective date of cancellation

The notice period will be stated in the policy, and will differ for personal auto, homeowners and
sometimes, other types of insurance. If the insured makes payment before the cancellation date,
coverage will be retained. If payment is not made within the grace period, however, these types of
coverage usually will terminate retroactively to the date the premium payment was due without any
further cancellation notice from the company.

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BM054-3.5-2-CMLAW (Commercial Law) Business Protection: Insurance

If coverage terminates or is canceled because of a missed premium payment, some insurance companies
may agree to "reinstate" coverage if all past due payments are made and the insured certifies that he is
not aware of any losses that have occurred since the cancellation date. Reinstatement is discretionary by
the insurance company, and the law usually does not require that policies be reinstated once they have
been legally canceled.

Further Reading:-

Bradgate, R., 2000, Commercial Law, 4th ed, London, Butterworths [Chapter 35: Insurance]
Dobson, P, 1997, Charlesworth’s Business Law, 16th ed, London, Sweet & Maxwell [Part 8: Insurance]

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