Insurance

The law is governed by Financial Services Act 2013 (FSA 2013).

(The Insurance Act 1996 has been repealed by section 271, FSA 2013).

What is insurance?
Insurance is about indemnification through financial compensation in the event one is faced with the
misfortune of theft, accidents, fire or natural perils resulting in the loss of life or property.

What is a contract of insurance?

An insurance contract is a contract where one party, the insurer, agrees to indemnify the other party,
the insured, against a loss which may arise upon the occurrence of some event or misfortune, or to pay
a definite sum of money upon the occurrence of the particular event.

In the contract is an arrangement whereby for a premium, the burden of risk is transferred from one
party, known s the insured or policyholder, to another party known as the insurer. The contract is called
an insurance policy.

Thus, and insurance contract can be defined as:

‘An agreement between the policyholder and the insurer according to which the policyholder
undertakes to pay an insurance premium in the manner, time and amount specified by the insurance
contract as well as to meet other obligations under the contract and the insurer undertakes to pay the
insurance indemnity to the person stated in the contract upon the occurrence of the insured event in
compliance with the insurance contract.’

Risk: The lost that is being insured is called the risk.

Policy: When the insurer and the insured enter into a contract of insurance this is evidence by a
document containing the terms of the insurance contract called the policy.

Premium: Premium is an amount paid periodically to the insurer by the insured for covering his
risk.

Classification of insurance business i.e. types of insurance

S5(1) FSA states that the insurance business shall be divided into two classes i.e. life business, and
general business.

Life business concerns only with life insurance policies;

General business concerns mostly with all other types of insurances, which is not life insurance, such as
marine insurance, fire insurance, accident insurance, motor vehicle insurance and aviation insurance etc.

Formation of the Insurance Contract

The basis of insurance contract is the contract. It is a contract by which one party, the insurer, in
consideration of the price paid to him adequate to the risk, becomes security to the insured party that
he shall not suffer loss, damage or prejudice by the happening of the perils specified to certain things
which may be exposed to them.

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The requirements for insurance contract are the same as the requirements of other types of contract.
Although the Contracts Act 1950 has jurisdiction regarding insurance contracts but in the event of
conflict or inconsistency between the Contracts Act and the Financial Services Act 2013, the latter shall
prevail.

Paragraph 1 (2) Schedule 9, FSA 2013 states that where there is a conflict or inconsistency between a
provision of the Contracts Act 1950 and the provision of this schedule, the latter shall prevail.

In an insurance contract, the proposer i.e. the insured, is the offeror whilst the insurance company
i.e. the insurer, is the offeree.

S84(1) FSA 2013 states that no licensed insurer shall assume any risk in respect of such description of
general policy as may be prescribed unless and until the premium payable is received by the licensed
insurer in such manner and within such time as may be prescribed by the bank.

Canning v Farquhar (1886)

In this case the court held that an offer to insure cannot be accepted after the loss has occurred so as to
bind the insurer. Before he could pay the insurance premium, the proposed insured was severely injured
in an accident where he fell over the cliff. He died later as a result of this accident. His insurance
premium was paid after the accident but before he died. It was held that there was no acceptance at the
time of the accident. Therefore, there was no contract of insurance because the insurance policy had
stated that the policy would only take effect after the first premium was paid.

Principles of Insurance Contracts:

1. Insurable Interest
Not all risks are insurable. A person who wants insurance must have an ‘insurable interest’ in the
risk.

He is said to have insurable interest if he will suffer loss in the event of property being destroyed.
E.g. If you are the owner of a house, you have insurable interest on the house because if the house
is damaged by fire or flood, as the owner. you would suffer a loss.

Similarly, a person would purchase an insurance policy because he has an insurable interest on his
own life e.g. if he loses his life or a limb, he would suffer a loss as he would not be able to earn an
income.

Macaura v Northern Assurance Co. Ltd. (1925) AC 619

Macuara owned a tree plantation which was covered by an insurance policy. Later he sold the
plantation to a company of which he was the only shareholder. After the sale, Macaura continued
to insure the plantation in his own name. A fire broke out and the plantation was destroyed.
Macaura then attempted to claim on the insurance policy but the insurance company refused to
pay. The issue was whether Macaura had an insurable interest at the time of the loss.

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 It was held that the insurance company was right in not paying. The plantation company was a
legal entity in its own right, separate from its shareholders. Therefore, the plantation company
had an insurable interest on the plantation but it had no insurance policy. Macaura, on the other
hand, had a policy but he had sold the plantation to the company and therefore no longer had any
insurable interest at the time of the loss.

With regards to life insurance, someone having an insurable interest in you means that
they would experience financial loss and hardship should you die

Exception to the General Rule – S 128 & Paragraph 3(1) of Schedule 8 FSA.

A person shall be deemed to have an insurable interest in the life of another person if that other
person is :

i. His or her spouse, child or ward below the age of 18;

ii. His employee;
iii. Any person who is dependent on him or her for maintenance or education.

NOTE: With regards to life insurance, someone having an insurable interest in you means
that they would experience financial loss and hardship should you die

2. Doctrine of Utmost Good Faith (Uberrimae Fidei).

Insurance contracts require the contracting parties to disclose to each other all information or
material facts which would influence either party’s decision to enter into the contract, regardless
of whether such information was requested or not. The failure to disclose such material
information will give the other party the right to avoid the contract.

This is because insurance contract are based on mutual trust and confidence between the insured
and the insurer – contract of uberrimae fidei.

The law assumes that in an insurance contract the insured is in possession of facts which would
influence the mind of an insurer in calculating the risk he is to undertake in order to underwrite
the insurance.

Rozanes v Bowen (1928)

Scrutton LJ states: ‘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, the man who desires to have a policy, to
make full disclosure to the underwriters without being asked of all the material circumstances,
because the underwriters know nothing and the assured knows everything. This is expressed by
saying that it is a contract of the utmost good faith – uberrimae fidei…’

Duty of disclosure – Section 150(1).

The insured must disclose material information to the insurer. Failure to do so, the insurer can
regard the contract as void.

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S 150 (1) imposes a duty of the propose insured to disclose matters that are relevant to the
insurer so that the insurer may make a decision whether to accept the risk and insure the
proposer. (See case below)

Goh Chooi Leng v Public Life Assurance Co. Ltd.

P was the assignee of a policy taken by the deceased LCH claimed for the sum insured. D, the
insurer, contended that they were not liable because the deceased had made false statements,
misrepresentation, concealment and the suppression of the truth.

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 There was medical evidence that the decease had tuberculosis between 1958 to 1959 but in the
insurance application form when asked, “Have you ever had advice about heart or lung or for
cough?” he had declared as “No”.

Held: The assured had been treated for the deceased in the hospital not long before he took up
the insurance policy. His answer in the declaration form was a deliberate lie. The insurance
contract was therefore void.

Material Facts or Material Information.

The proposed insured is not expected to disclose all facts. He is only required to disclose material
facts.

What is material fact?

Material fact is a fact that would influence the mind of the insurer whether to accept the risk and
if so at what premium. If the proposed insured fails to disclose a fact which is not material, the
contract of insurance is still valid. But if there is non-disclosure of a material fact the insurer can
avoid liability.

Lambert v Co-operative Insurance Society Ltd. (1975) – the court of Appeal held that the duty to
disclose extends to information which is material in the eyes of a reasonable insurer.

New India Assurance Co. Ltd. v Pang Piang Chong & Anor. (1971) MLJ 34.
The insured was killed in a road accident. His dependants made a claimed of damages for
negligence from his insurance policy which covered such liability.

The insurer refused to pay on grounds that the insured did not disclosed a material fact. One of
the questions in the insurance form was, ‘have you or any person who to your knowledge will
drive, been convicted during the past five years of any offence in connection with the driving of
any motor vehicle? The insured answered ‘No”. In fact, the insured had been convicted under the
Road Traffic Ordinace 1958 for driving without a license and not displaying the ‘L” plate.

The court held that the statutory offences for which he was convicted did not show that he was
irresponsible for the purpose of the insurance coverage and he was therefore not a bad risk. His
answer to the question did not constitute a non-disclosure of a material fact. Thus, the claimed
was valid and the insurer had to pay the insured.

3. Indemnity and non-indemnity insurance contracts

All insurance contracts are contracts of indemnity. But life insurance and accident insurance are
not contracts of indemnity.

In indemnity insurance contract the insured is entitled to recover the actual commercial value of
what he has lost through the occurrence of an insured event e.g. damage to property, fire or theft.
In the case of a loss, the insured is entitled to be indemnified i.e. to be compensated for his loss
but he cannot recover more than his actual loss.

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 Indemnity contracts is to restore the insured to as closed as possible to his original financial
situation. The insured is not to profit from the loss. The indemnity amount to be paid is not base
on an agreed amount but is calculated after the loss had occurred.

In a non-indemnity insurance contract the sum in which the insured is entitled to receive does not
necessarily equate or bear any relation to the actual loss e.g. life insurance, medical insurance or
personal accident insurance.

4. Doctrine of Subrogation
Under common law, the rule is that the person who caused the loss or who was primarily liable
must be responsible for the damages sustained. Therefore, in insurance law, the insurer, having
paid to the insured the amount loss, has a right of action against the person responsible for the
loss.

The doctrine give the insurer whatever rights the insured possessed, to sue the person or third
party who is responsible for the damages.

Thus, the insured’s rights are subrogated to the insurer i.e. the insurer steps into the shoes of the
insured, and make a claimed against the third party who was responsible for the loss. The insurer
will sue the third party in the name of the insured.

End of Topic