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1. INSURANCE CONTRACTS

General introduction on insurance contracts

Definition of insurance

In the case of Lucena v Craufurd1, insurance is defined as “a contract by which the one party in

consideration of a price paid to him, adequate to the risk, becomes security to the other 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.”

This contract usually involves a stipulated consideration which manifests in two forms2;

a. As a premium-a sum that the insured pays in return for the compensation and

b. As a promise-to adhere to all the conditions the parties agreed upon in the contract- note

that negligence or omissions on the part of the insured party releases the insurer from

liability i.e. the compensation that the insured was earlier on entitled to.

Contract

A contract is defined as “an agreement enforceable at law, made between two or more persons,

under whom rights are acquired by one or more, to act, or forbearance on the part of the other, or

others3.”

1
(1806) 2 B&P (NR) 269, HL
2
https://www.britannica.com/topic/insurance/contract-law
3
Introduction to business law by Dr. K I Laibuta 2017
 2

The party being insured is referred to as the “insured” or “assured” while the party making the

compensation is referred to as the “insurer”.

Nature and scope of insurance contracts

Insurance contracts fall under what can be termed as “normal contracts” as they contain elements

that apply to the contracts in general. (Offer and acceptance, capacity to contract, intention to

create legal relations, consideration and legality)

However, a distinction comes in where other special elements/features are attached to this type

of contracts, For instance, the elements of insurable interest and utmost good faith.

Insurance contracts should be in writing for example, and in this case the written contract of

insurance is known as an insurance policy.

The purpose of the contract is to insure persons against what is referred to as risks or perils.

Examples of such risks or perils are property risks and accidents.

On the other hand, the subject of the contract, the right, or interest being protected is known as

an insurable interest. Insurable interests will vary from one thing to another, insurance against

fires, car accidents and theft of goods etc.

Parties to an insurance contract will come to an agreement, hereby known as insuring agreement.

The insuring agreement represents the following4;

a. Risks that are covered-

b. Limitation of the policy -

4
https://thismatter.com/money/insurance/insurance-contracts.htm
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c. The term of the policy

Elements of insurance contracts

1. Utmost good faith

2. Insurable interest

3. Subrogation

4. Indemnity

5. Proximate cause

6. Return of premium

7. Assignment and nomination and

8. Warranties

2. PRINICPLES OF INSURANCE CONTRACTS

This are guidelines that govern the relationship between the insurance company and the insured.

They include:

1. Utmost good faith

2. Insurable interest

3. Subrogation

4. Indemnity

5. Proximate cause
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6. Contribution

2.1 Insurable Interest

Insurable interest refers to pecuniary or proprietary interest in that a person derives pecuniary

benefit from its existence or will suffer pecuniary loss from its destruction. 5 Therefore, a person

can only insure property that he or she stands to suffer a direct financial loss in case the risk

insured against occurs. It aims at preventing one from insuring other people’s property and later

damaging them so as to be compensated.

Illustration:

One cannot insure their friend’s house because they have no insurable interests.

If an individual insures a home but ends up selling the home, he/she cannot get any

compensation if the house burns after the sale because the insured has suffered no loss at the

time of the fire (property insurance)

2.1.1 Features of insurable interest

1. The right for a party to an insurance contract to sue on the contract. This means that any

person who sues on a policy can only sue in respect of his own interest.

2. It establishes pecuniary interest of the insured in the subject matter of insurance. This

helps to distinguish the policy from wagers where wagering contracts are void and

unenforceable.

5
N.A Saleemi, Commercial Law Simplified (Saleemi Publications Ltd Nairobi, 2013) p.297.
 5

3. The presence of the insurable interest makes it difficult for one to destroy the subject

matter of the insurance.

2.2 Doctrine of Utmost Good Faith or “Uberrima Fides”

It is the inherent duty of both parties to a contract of insurance require to disclose all the

material facts relating to the person or property being insured which is done at the time of

entering the contract. Material facts means any fact that may affect the judgement of a

prudent insurer in considering whether he would enter into a contract at all or enter into it at

one premium rate or another.6 The information should be disclosed fully and fairly.

For example, in life insurances suffering from an illness such as asthma, diabetes, cancer is a

material fact but if one usually has occasional headaches that will not amount to a material

fact. Moreover, if a person over or under insure their property they will have violated this

principle. To under insure property is when someone quotes a lower figure than the true

value of their property which results in the payment of lower premiums. In the event of

complete loss, the person will be paid the amount they insured against. On the other hand,

over insurance arises where a person discloses a higher value of their property than its true

value. In the event of loss, the insured would be paid the actual value which will be less than

the sum insured.

This applies where there is total loss of the property insured but where there is partial loss,

the average clause applies which means a person will only recover such proportion of the

loss as the value of the policy bears on the property insured.

2.3 Indemnity

6
Ibid p.294.
 6

This involves putting a person in the financial person they were in before the risk occurred. It

aims at compensating the insured and not benefiting them. For example, if one insures their

vehicle against theft for ksh 300,000, if the vehicle is stolen the person can only be

compensated the amount they insured against, that is ksh 400,000. The principle of indemnity

does not apply to life policies as its impossible to indemnify loss of life. This principle does

not also apply to personal injuries.

In the case of Theobald v Railway Passengers Assurance Co.7 the court observed that one

cannot be indemnified for loss of life as it does not amount to a contract of indemnity. Also,

in the case of Beresford v Royal Insurance Co.8 the claimant had insured his life with the

defendant company. He shot himself with the intention that the insurance money should be

paid to his estate. It was held that his estate could not recover the insured sum because his act

of suicide was deliberate and it aimed at benefiting his estate out of his crime.

2.4 Proximate Cause

For the insured to be compensated there must be a very close relationship between the loss

suffered and the risk insured against. The loss must arise directly from or be closely

connected to the risk insured. For example, if a person insures their goods in a building

against fire. If fire breaks out and in the process of fighting it water sprinkles into the goods

and damages them, the owner of the goods although he/she has suffered loss cannot be

compensated because the cause of the damage is water which is not directly related to the

risk (fire) insured against.

7
[1854] 10 Exch 45 at 53.
8
[1938] AC 586.
 7

Generally, the insured has the burden of proving that the loss was caused by a peril insured

against.9

2.5 Subrogation

To subrogate is to find a substitute for. The principle of subrogation presupposes the

existence of an insurance contract this means that the remains of a property insured after one

has been compensated, becomes property of the insurer. In the case of Leslie John Wilkins v

Buseki Enterprises Ltd10 The high Court upheld the judgement of the Magistrate Court

where the learned trial magistrate stated “…Under the doctrine of subrogation, after the

insurer has replaced the loss, the insurer can now step into the shoes of the insured and

recover any claims against third parties.”

In the case of Securicor Guards (k) Limited v Mohamed Saleem Malik & another i11 where

the High Court observed that the principle of subrogation applies where there is a contract of

insurance and following the crystallization of the risk insured, the insurer had compensated

the its insured for financial losses occasioned by a third party and the insurer goes ahead to

step into the shoes of the insured and enjoys all rights, privileges and remedies accruing to

the insured including the right to seek indemnity from a third party.

Illustration: if one insures their vehicle for 500,000ksh against accidents. If the accident

occurs and the insurance company compensates them, the scraps from the vehicle once sold,

that money goes to the insurance company. Reason being, it will be against the principle of

indemnity which states that the aim is to compensate and not to benefit the insured.

9
Uzuri Foods Limited v Occidental Insurance Company Limited [2020] eKLR.
10
[2015] eKLR.
11
{2019] eKLR.
 8

This principle does not apply to life assurance and personal accident insurance since there is

nothing to subrogate.

2.6 Contribution

It operates in a situation where the insured has taken policies with two or more insurance

companies covering the same risk. In the event of loss, the insurers would contribute

proportionately in order to indemnify the insured. Total amount received from the different

insurers must be equal to the loss suffered. It aims at ensuring the insured does not benefit

from a misfortune.

For example, If Aisha insures his house for Ksh1,000,000 against fire with two insurance

companies. In the event of a fire breakdown, Aisha will not be compensated 2,000,000 but

each insurance company will contribute ksh500,000 making the total compensation to be

ksh1,000,000 which is actual sum insured.

3. INDEMNITY, GUARANTEE AND CONTRACTS OF NOVATION

3.1 Contracts of Guarantee

A contract of guarantee is defined as a contract to perform the promise or discharge the liability

of a third person in case of his default. In other words, it arises when a person assures the other

party that he will fulfill the obligation in the case of fault by a third party. By this, it assures the

promisee. It is a collateral agreement in which the guarantor is held liable for the default of the

principal debtor. In the case of Kanyoro v Wakarwa Printers12 it was stated that any material

variation of the contract between the creditor and the principal debtor will discharge the surety

from liability by the creditor dealing with the principal debtor.

12
(2005)eKLR
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A creditor has the obligations in a contract of guarantee of not changing terms of the original

contract, not to agree not to sue the principle debtor and not to discharge a principal debtor when

he fails to pay back. He or she must also not act contrary to the rights of the surety.

The person who gives the guarantee is called ‘surety’; the person for whom the guarantee is

given is called the ‘principal debtor’ and the person to whom the guarantee is given is called the

‘creditor’. This means that in a contract of guarantee, there are always two contracts; that

between the creditor and the principal debtor and that which is between the surety and the

creditor. The contract between the surety and the principal debtor in implied. The creditor has the

right to demand for payment from the principal debtor and if he refuses to pay, he may ask the

surety to pay.

In the case of Kenya Commercial Ltd v Mwanzu Mbaluka and Another 13 it was held that

liability of the guarantor would only arise where there is default by the principal debtor and

where there has been a formal demand to the guarantor to pay the sum.

3.1.1 Types of Guarantees

A contract of guarantee can be written and oral or specific and continuing. It is always safer to

put the agreement in writing as most parties prefer since it may be difficult to prove an oral

agreement of guarantee. A specific guarantee is given for only one particular debt or transaction

and only ends after repayment. A continuing guarantee is that which is not limited to a single

transaction but extends to a variety of transactions and it can only be revoked by death or by

notice.

13
(1997)eKLR
 10

In Ebony Development Ltd v Standard Chattered Bank Ltd, 14 it was held that the security of

charge was guarantee. The obligation of a guarantor is clear. He becomes liable upon default by

the principal debtor. It is not the guarantor to see to it that the borrower complies with his

contractual obligation but to pay on demand the guaranteed sum.

In Surgipharm v Awuondo and Another15, Nyamu J held that on the default of the principal

debtor causing loss to the creditor, the guarantor is apart from a special stipulation, immediately

liable to the full extent of his obligation without being entitled to require notice of the default

against the principal guarantor.

3.2 Contracts of Indemnity

A contract of indemnity is a contract where one party promises to compensate the loss occurred

to the other party due to the act of the promisor or a third party. The contract involves two

parties; the indemnifier and the indemnified. It can also be defined as an unconditional

agreement by one person called an indemnifier to pay to another called an indemnified sums that

are owed or may be owed to him by a third person. It is protection against future loss. Just like

all other contracts, a contract of indemnity must have all the valid essentials of a contract. The

contract must not be in writing an oral one is equally enforceable. An indemnified has the right

to recover from the promisor all damages and the cost of the suit.

3.3 Differences between a Contract of Guarantee and a Contract of Indemnity

14
(2008)eKLR
15
(2011)eKLR
 11

1. In a contract of indemnity, there are only two parties namely; the indemnifier and the

indemnified while in a contract of guarantee there are three parties namely; the creditor,

principal debtor and the surety.

2. The liability of the indemnifier is primary and independent while the liability of the surety is

secondary as the primary liability is that of the principal debtor.

3. Unlike a guarantee, an indemnity must not be in writing. An oral one is equally enforceable.

4. In a contract of indemnity, the indemnifier cannot sue a third party for the loss while in a

contract of guarantee; the surety can sue the principal debtor.

5. In a contract of indemnity, the indemnifier need not necessarily to act at the request of the

indemnified while in a contract of guarantee, surety must act when giving guarantee at the

request of the debtor.

6. A contract of indemnity provides security while a contract of guarantee provides assurance to

the guarantee.

3.4 Contract of Novation

A contract of novation is a contract whereby an old obligation is substituted by a new obligation

that may replace the existing obligation with a new one. A contract of novation is intended to

eliminate or release a former debtor and to substitute a new debtor in his position. An example

may be in a contract where party A is to give party B some bags of maize and another contract

where B is supposed to give the bags of maize to C. In this case, the two contracts may be

replaced by a single contract where A agrees to give the bags of maize directly to C. In a contract

of novation, the consent of the original party is always required and it does not cancel past rights
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of the parties. Instead, it transfers rights and obligations of the outgoing party to the incoming

party. Upon novation of a contract, the original contract is annulled by the new one.

A contract of guarantee can be distinguished from that of novation in that a novation discharges

previous contractual duties to make compensation. In this type of contract, a person transfers the

burden as well as the benefits under it. In a contract of guarantee, no benefits are transferred but

only the obligation to pay the creditor. In a contract of novation, most parties will often use a

‘deed of novation’ which removes the requirement of providing consideration while in a contract

of guarantee, anything that is done for the benefit of the principal debtor may be sufficient

consideration to the surety for giving the guarantee.

In the case of Commerce Bank Ltd v Kukopesha Ltd 16, the judge cited in his judgment that ‘ a

novation denotes the rescission of one contract and the substitution of another in which the same

acts are to be performed by different parties. A novation cannot be forced on a new party without

his agreement.’ The plaintiff sued the defendants as acceptor of promissory bills. The plaintiff

claimed that the bills were not honored in full on their due dates. By this there was a breach of

the agreement between the parties and that it automatically converted the debt onto a loan

accounts per the accommodation. The defendants denied the claims stating that there was no

consideration hence they were not liable to pay. They pleaded that the plaintiffs changed terms of

the agreement and made a new agreement by virtue of novation therefore they were fully

discharged of any liability. The court held that the plaintiff failed to prove that the defendants

had agreed to the rescission of the new contract and that they were party to the new contract.

Therefore, the new contract cannot be forced on the defendants.

4. DUTY OF FULL AND HONEST DISCLOSURE

16
(2008)eKLR
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Generally, parties are not usually obliged to disclose material facts beyond those that are

necessary to communicate their;

a) corresponding offer and acceptance

b) define terms by which they wish to be bound

Duty of disclosure refers to a legal principle that you must tell the insurance company anything

that you must tell the insurance company anything that you may or a reasonable person in your

circumstance would know and in which is relevant to the insurance company’s decision to offer

policy to you.

The nature of a particular contract may require a full and honest disclosure by the parties of all

material facts as a condition to its validity. For instance, a contract of insurance is a contract of

utmost good faith, it imposes a duty of full disclosure of all material facts by the assured

(insured), failing to which may repudiate contract by injured insurer. The insured is therefore

under the obligation to make full and honest disclosure of all facts known that are material to the

contract.

In the case House of Manji Ltd v Liverpool Marine Insurance Co. Ltd 17 where the Plaintiffs

were manufacturers of biscuits which they distributed throughout East Africa. The Plaintiffs

arranged with the defendants to insure their products by means of marine insurance and they

were bound to declare each and every shipment of goods to the defendants and in respect the

defendants would issue a policy. The Plaintiff had a consignment of biscuits from Nairobi to

Kampala by a contractor’s lorry. The transporter had no license for the vehicle as required by

section 4 of Transport Licensing Act and in the declaration, the plaintiff did not specify the

17
( 1964) EA. P.693
 14

vehicle as they should have done. In practice, the defendants used to issue certificate of

insurance for the consignment. Before reaching its destination, the lorry was involved in an

accident and as a result a portion of consignment was damaged and a number of cartons of

biscuits disappeared. The plaintiffs claimed damages for which defendant said they were not

liable on the grounds that carriage was illegal and that the plaintiffs’ failure to inform them that

unlicensed transport was to be used was a non -disclosure of material facts.

The court held;

1. That the plaintiffs were well aware that unlicensed transport was being normally employed

by them

2. The breach of statutory requirement contained in S.4 of Transport Licensing Act went to the

root of the enterprise and not merely collateral to it.

3. The defendants were not liable to pay damages to the plaintiff since an unlicensed lorry was

used to transport goods. However, the right was subject to proof that unlicensed transport

would amount to non- disclosure.

4. The action was thus dismissed.

4.1 Materiality and Duty to Disclosure

A material fact is anything that may influence the judgment of a prudent insurance underwriter in

deciding whether to accept a risk and if so at what premium and terms. Thus under insurance

principle of utmost good faith, you should disclose all the material facts about your risk which

you know or should know. It is not in the assured discretion to decide what is material for
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disclosure. Accordingly, the assured is bound to disclose all facts within his knowledge as

required by the underwriter or as would otherwise influence the insurers decision in considering

whether to accept or reject the proposal. In the case Joel v Law Union and Crown Insurance,1819

Moulton LJ observed that the duty is a duty to disclose and you cannot disclose what you do not

know. The obligation is to disclose, therefore, necessarily depends on the knowledge you possess

and not your opinion of the materiality of that knowledge, where a reasonable man would have

recognized that it was material to disclose the knowledge, it is of no excuse that you did not

recognize it to be so.

4.2 Types of Material Facts to be Disclosed

These include:

a) changes to your business description

b) prosecutions or convictions, judgments including those pending

c) special terms and conditions applied under previous policies

d) previous losses incurred and claims made under previous insurances

e) a fact which increases the risk must be disclosed e.g. Storage or use of flammable materials

In Bufe v Turner20 the proposer omitted to mention that a fire had been broken out in the

premises of a third party adjoining the assured’s ware house on the day of proposal. The fire

insurance policy in question was repudiated for failure to appraise the insurers of the

neighbouring fire, even though the terms of insurance did not expressly require such specific

communication. Thus it was immaterial, that the assured was not guilty for fraud or dishonest

18

19
(1908) 2 KB p.863.
20
(1815) 6 Taunt p.338.
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design as long as he failed to disclose such information as would have influenced insurer to

either decline or accept the proposal.

Similarly, in London Assurance v Mansel21 where a rescission of contract of insurance was

granted on grounds that the assured had failed to disclose that several insurance companies had

declined proposals to insure his life, a material factor which should have been disclosed. Since it

was of no doubt, that grounds of which previous proposals had been rejected would have been

decisive in influencing the underwriter in determining whether or not on what terms to accept the

proposal.

A policy against burglary was likewise avoided because of applicants’ failure to disclose

previous burglaries, his foreign origin and a change of his name. Concealment of these facts was

detrimental to the interests of the underwriter and completely eroded fundamental element of

utmost good faith required by the assured.22

4.3 The test of Materiality and Extent of Duty to Disclosure

In Lambert v Co-operative Insurance Society Ltd 23; Justice McKenna advanced four possible

rules or tests of the extent of the duty of disclosure and the materiality test;

1. The duty is to disclose such facts as the particular assured believes to be material.

2. To disclose such facts as a reasonable man would believe to be material

3. To disclose such facts as particular insurer would regard to be material

4. To disclose such facts as a reasonable man or prudent insurer might have treated material

21
(1879) 11ChD P.363.
22
(1922) 11 Lloyds Law Reports p.113.
23
(1975) 2 Lloyds Reports p.485
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4.4 Consequences upon Disclosure of Material Facts

The insurer who discovers some material fact has not been disclosed to him by the assured

during negotiations for the contract, has the right to either;

1. Continue to perform the contract and to require its continued performance by the assured

2. To repudiate the contract and treat it as an end so far as concerns any future performance

Non-disclosure of such facts destroys the very foundation of the contract and renders it voidable.

The consequence upon concealment was set out in Locker and Woolf Ltd v Western Australian

Insurance Co Ltd24 the underwriter vitiated a fire policy where the assured falsely stated that no

other company had previously declined any proposal while in fact another company had

previously refused to issue a policy in respect of his motor vehicle. This failure to disclose any

particulars material to such contract entitles the underwriter to disclaim liability and vitiate the

contract.

4.5 Exceptions to Disclosure

Lord Tenterden observed that the party is not bound to do more than answer question proposed,

unless he can be charged with some fraudulent concealment.25

In any event, the insured need not mention any of matter;

1. What the insurer knows or ought to know (reasonably presumed to know)

2. What the insurer takes upon himself the knowledge of (upon inquiry)

24
(1936) 1 KB P.408.
25
Lindenau v Desborough (1828) 8B and C p.586
 18

3. What he waives being informed of (abandons to know)

4.6 Effects of NON EST FACTUM Maxim on Contract of Insurance

The maxim non est factum is a defense in contract law that allows a signing party to escape

performance of an agreement. The maxim prevents a contract from ever coming to existence at

all. This imposes on the insured the imperative and inescapable duty of full and honest

disclosure.

4.7 Remedies upon non-disclosure by either party

Lord Mansfield in Carter v Boehm26 observed that the common law obligation to disclose is

mutual and equally binds the underwriter and his agents in like terms. For instance, all

representations made by the insurers or their agents during negotiations with a view of inducing

the assured to take out a policy must not only be true but also in disclosure of all material facts

within their knowledge. A policy would be equally void against an underwriter, who conceals

and fails to disclose any material facts.

Upon repudiation, consequential rights and duties done under the contract for instance, premiums

already and claims already met are determinable under English law. Lord Diplock LJ, stated that

the contract ceases to exist from the moment of avoidance and upon its ceasing there arises

consequential rights in respect of thing done in performance thereof, which have the effect of

undoing these things so far as it is practicable.

For instance in the case Hughes v Liverpool Victoria Legal Friendly Society 27 where it was held

premiums may be recoverable in a voidable contract. The plaintiff was entitled to recover

26
(1766)3Burr p.1905
27
(1916) 2KB p.482
 19

premiums paid in respect of a life policy taken on inducement by the agents who fraudulently

misrepresented that she could recover the sum assured under the policy if she paid the requisite

premiums in respect of a life which she had no insurable interest. The policy was unenforceable

for want of legal basis and voidable at her instance.

5. REINSURANCE AND DOUBLE INSURANCE

5.1 Reinsurance

Reinsurance is insurance that an insurance company purchases from another insurance company

to insulate itself, at least in part, from the risk of a major claims event. The company that

purchases the reinsurance policy is called a ceding company or a cedent.

According to the Insurance Act, a reinsurance business means the business of undertaking

liability to pay money to insurer or reinsurers in respect of contractual liabilities in respect of

insurance business incurred by insurers or reinsurer and includes a retrocession. 28 Retrocession is

the reinsurance of reinsurance business accepted by a reinsurer, and the person carrying out

retrocession is referred to as a retrocessionaire.

During reinsurance, the company being reinsured passes on some of its own insurance liabilities

to the other insurance company. The sole purpose of reinsurance is to lower the risk or reduce the

exposure of insurance companies to a specific catastrophic event. This will therefore protect the

companies’ customers from uncovered losses.

One of the best examples of how reinsurance could have been very effective is when the

hurricane referred to Hurricane Andrew caused $15.5 billion in damage in Florida in 1992 and

seven U.S insurance companies became insolvent (unable to pay debts owed) because they were
28
Insurance Act, Cap.487 sec.2.
 20

unable to pay the claims resulting from the disaster. Had the insurance companies used a portion

of the premiums they got from their customers to insure them, they would have had a “support

system”, that is, the reinsurance companies, which would have helped them to stay solvent by

paying some of the claims.

Reinsurance can be classified into two main categories; treaty reinsurance and facultative

reinsurance. Treaty reinsurance agreements cover all or a portion of an insurer’s risks, and they

are effective for a certain period of time. Facultative coverage insures against a specific risk

factor.

Reinsurance can either be proportional or non-proportional. A proportional reinsurance (also

known as pro rata reinsurance) agreement requires the reinsurer to bear a specific portion of the

losses, for which it receives a share of the insurer’s premiums equal to the losses transferred to

the reinsurance company. For instance, a reinsurance company might be required to bear only

40% of the losses. Non-proportional reinsurance, also referred to as “excess of loss” reinsurance,

means that a reinsurance company will cover the losses of an insurance company when it

exceeds a certain amount. For example, it will cover losses above 10 million shillings.

In Kenya, section 29 of the Insurance Act provides for the appropriate reinsurance arrangements.

An example of a reinsurance company in Kenya is the Kenya Reinsurance Corporation Limited,

also referred to as the Kenya Re, and it provides reinsurance services to insurance companies in

Kenya, Africa, Middle East and Asia. In the case of Kenya Institute of Management v Kenya

Reinsurance Corporation,29 the plaintiff sought an order in the nature of a an injunction to

restrain the defendant, its servants and or agents from advertising or offering for sale the property

29
(2008) eKLR.
 21

known as LR.No.209/11154- Nairobi, otherwise known as South C Sports Club to any other

party whatsoever save the plaintiff.

In the case of Certain Underwriting Members of Lloyd’s of London v. Florida Department of

Financial Services, Insurance Company of the Americas (ICA) insured workers’ compensation

claims for the construction industry. When ICA became insolvent, the Florida Department of

Financial Services (defendant) served as ICA’s receiver. Certain Underwriting Members of

Lloyd’s of London (plaintiff) reinsured ICA under contracts called reinsurance treaties, which

required arbitration of any disputes. After the underwriters denied coverage of $12.5 million

worth of claims, ICA demanded arbitration under the treaties. The treaties required each side to

choose a “disinterested” arbitrator, who together chose a neutral third to form a panel of three.

ICA chose an arbitrator who already had extensive business relationships and connections with

ICA, but the arbitrator did not disclose them and instead denied any close association. The

arbitration panel awarded ICA damages of $1.5 million, and the underwriters petitioned to vacate

the award on multiple grounds. The court vacated the arbitration award on grounds of evident

partiality, and ICA appealed.

Insurance companies may suffer a reinsurance risk, which refers to the inability of the ceding

company or the primary insurer to obtain insurance from a reinsurer at the right time and at an

appropriate cost. This may be due to reasons such as an unfavourable market condition. This

therefore means that the insurance company will be at risk of insolvency in the occurrence of a

deadly situation.

5.2 Double Insurance

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Double insurance is a concept that occurs when a business has insurance cover in respect of the

same risk and subject matter from more than one insurer. If a husband and wife have duplicate

medical insurance coverage protect ting one another, they would thereby have double insurance.

A double insurance differs from reinsurance in the sense that it is made by the insured with a

view to receiving a double satisfaction in case of loss, while a reinsurance is made by a former

insurer to protect himself and his estate from a risk to which they were liable by the first

insurance. It should be noted that in the event of a loss, the insured shall not be permitted to

recover a double satisfaction. he can sue the insurers but he can only recover the real amount of

his loss.

The salient features of a double insurance are;

1) Subject matter is insured with two or more insurance companies

2) The insured can claim the amount from the policies

3) The insurer cannot claim more than the actual loss.

Double insurance is legal but is highly discouraged, since making two claims with two different

insurance companies for the same accident may be considered an insurance fraud. It is also

unnecessary since having double insurance will not lead to any unjust enrichment of the insured

in the event that a loss occurs.

6. CONCEPT OF INSURABLE INTEREST.

Insurable interest is a doctrine that is mainly recognized in insurance and contract laws. It is also

a core aspect of most insurance policies. There have been many descriptions of this concept one

being the one found in the Lucena v Craufurd (1806) case. Here it was described in these words;
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“A man is interested in a thing to whom advantage may arise or prejudice may happen, from the

circumstances which may attend it. To be interested in the preservation of a thing, is to be so

circumstanced with respect to it as to have benefit from its existence, prejudice from its

destruction”

In simpler words, Lord Eldon meant that a person can be said to have insurable interest to

something when loss or damage to it will cause financial loss or any other disadvantage. For

instance, when taking an insurance policy for your car, you can be said to have an insurable

interest because in the event of an accident, you will incur a financial loss when trying to repair

it. Should you have an accident in another person’s car, you don’t suffer any financial loss

therefore would have no reason to insure the car. However, insurable interest in property is not

confined to legal ownership only as explained later.

There are 2 main types of insurable interests;

1. Contractual

2. Statutory

Where an insurance contract requires there to be insurable interest for the policy to be in effect,

then that is a contractual type of insurable interest. On the other hand, insurable interest that is

mandated by a statute or any other law will fall under the statutory insurable interest. These may

include the Law of Contracts Act and the Insurance Act cap 487 (94). The latter mainly has

provisions in regards to life insurance policies.

Insurable interest in life as earlier mentioned, has its provisions in the Insurance Act from section

94-97. Here it is generally said that a person can be said to have insurable interest on the life of
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another if they are wholly or partially dependent on them for financial support. For instance, a

wife in the life of her husband and vice versa. Employers may also have insurable interest over

the lives of their employees.

As aforementioned, insurable interest becomes flexible when it comes to property. In sale of

goods, for instance liability and risk of loss of the goods shifts from seller to buyer under

different circumstances. In this sense, a carrier may insure the goods in transit so as to cover his

own personal liability to the owner of the goods. The carrier may also insure the full value of the

goods which the owner can be said to have insurable interest on in a bid to cover his liability.

This shows that a person with a limited interest in property may insure to cover his own interest

only. It is why a shareholder may insure his own share of which he/she has an insurable interest

in. This was seen in Wilson v Jones (1867).

The doctrine of insurable interest is integral in preventing fraudulent insurance claims as well as

gambling. For instance, many people would insure the property of others in the hope of an early

loss for compensation. Others may insure the lives of others hoping for early deaths. Had there

been no insurable interest in these contracts, dishonest people may purchase an insurance policy

on someone else’s property and cause damage for the financial gains. The concept can also be

used to measure the amount of the insured’s loss in the property so that in the event of a loss, the

payment will be matched. In essence, there cannot be any insurance without insurable interest.

7. ASSIGNMENT AND SURRENDER

7.1 Assignment

Assignment refers to the transfer of certain or all (depending on the agreement) rights to another

party. The party which transfers its rights is called an assignor, and the party to whom such rights
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are transferred is called an assignee. Assignment only takes place after the original contract has

been made. As a general rule, assignment of rights and benefits under a contract may be done

freely, but the assignment of liabilities and obligations may not be done without the consent of

the original contracting party.

7.1.1 Types of Assignments

There are two types of conventional insurance policy assignments:

1. An absolute assignment is typically intended to transfer all your interests, rights and

ownership in the policy to an assignee. When the transaction is completed, you have no

further financial interest in the policy. The terminology of absolute assignments differs from

contract to contract. It may state that you transfer all rights, title, and interest in the policy to

the assignee. Some insurance companies use an “ownership clause” to accomplish this

transfer.

2. A collateral/conditional assignment is a more limited type of transfer. It is a security

arrangement to protect the assignee (lender) by using the policy as security for repayment.

After the debt is repaid, the assignee releases his or her interest in the policy, and all rights to

the policy revert to the owner.

Under the usual procedure, if the collateral assignment is still in force at the time of your death,

the assignee informs the insurance company of the remaining debt, including interest, and

receives that amount in a lump sum. Any excess proceeds are then payable to your named

beneficiary in accordance with the beneficiary designation in your policy.

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To fully protect the assignee, notice must be given to the insurer that the assignment has been

made. If a company without notice of assignment pays the proceeds to another assignee or to a

named beneficiary, the insurance company cannot be forced to pay a second time.

7.1.2 Policy Provisions

Some typical policy provisions regarding assignments may include the following:

 The assignment will not be binding until the original, or a duplicate thereof, is filed at the

insurance company’s home office.

 The insurance company assumes no obligation as to the effect, sufficiency, or validity of the

assignment.

 The assignment is subject to any indebtedness to the insurance company on the policy.

7.1.3 Effect of Assignment

Immediately on the execution of an assignment of an insurance policy, the assignor forgoes all

his rights, title and interest in the policy to the assignee. The premium or loan interest notices etc.

in such cases will be sent to the assignee. However, the existence of obligations must not be

assumed, when it comes to the assignment. It must be accompanied by evidence of the same. The

party asserting such a personal obligation must prove the existence of an express assumption by

clear and unequivocal proof.

Assignment of a contract to a third party destroys the privity of contract between the initial

contracting parties. New privity is created between the assignee and the original contracting

party. In the illustration mentioned above, the original contracting parties were P and Q. After

the assignment, the new contracting parties are Q and S.

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7.1.4 Revocation of Assignment

Assignment, once validly executed, can neither be revoked nor canceled at the option of the

assignor. To do so, the insurance policy will have to be reassigned to the original assignor (the

insured)

7.1.5 Exceptions to Assignment

There are some instances where the contract cannot be assigned to another.

Express provisions in the contract as to its non-assignability – Some contracts may include a

specific clause prohibiting assignment. If that is so, then such a contract cannot be assigned.

Assignability is the rule and the contrary is an exception.

Contracts which are of a personal nature – Rights under a contract are assignable unless the

contract is personal in its nature or the rights are incapable of assignment. pensions, PFs, military

benefits etc.

7.1.6 Enforcing a Contract of Assignment

From the day on which notice is given to the insurer, the assignee becomes the beneficiary of the

policy even though the assignment is not registered immediately. It does not wait until the giving

of notice of the transfer to the insurer. However, no claims may lie against the insurer until and

unless notice of such assignment is delivered to the insurer.

If notice of assignment is not provided to the obligor, he is discharged if he pays to the assignor.

Assignee would have to recover from the assignor. However, if the obligor pays the assignor in

spite of the notice provided to him, he would still be liable to the assignee.
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7.2 SURRENDER

A surrender is a full cancellation of an insurance policy.

7.2.1 Reasons For Surrender

7.2.1.1 Cash Value

The big advantage of surrendering a life insurance policy is the access to the cash value. When a

policy is surrendered, it does not merely cease premium payments, it also releases all the saved

value to the client (assuming they have not withdrawn or loaned it from the policy already).

Generally speaking, the older a policy is and the longer it has been active, the higher the cash

value will be. People often surrender their life insurance contracts as one of the first ways to pay

unexpected expenses such as house repairs or to get through a period of unemployment.

7.2.1.2 Superfluous Coverage Surrender

People also surrender life insurance contracts because sometimes they might not need the

coverage anymore. Many people have owned whole life insurance policies for over 20 years.

During this period of time many life changes may have taken place. Children may have grown

and are no longer dependent on their parents for support, marriages may end in divorce and life

insurance is not needed to protect an ex-spouse, companies may be sold and key man insurance

is no longer needed, or a beneficiary may predecease the insured and the coverage may be

unnecessary.

7.2.1.3 Cheaper Coverage- Especially From Better Health

Sometimes an insured person may find less expensive coverage from another company. This

may be because they never comparison shopped for insurance in the first place and ended up
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paying more than they should have, or it may be for other health related changes. If the insured

person goes through a major shift in health in a positive direction such as weight loss, a new

policy may actually be less expensive than the old. While people can apply for a better health

rating with an existing policy, they may not be granted the better rating. A new policy may give

the insured the opportunity to have the same coverage for less expense.
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