Insurance
Insurance is about shifting a risk of loss from one party to another. The purpose of insurance contracts, therefore, is to allow one party to shift this risk of loss to which they would ordinarily have to bear
to another party. Under the insurance contract, the insurer, in exchange for the payment of the consideration (called the premium in insurance terms), agrees to reimburse the insured for the loss that is caused by specific events (called perils insurance terms). Insurance contracts transfer existing risks. Insurance arrangements are often made by the insurer and insured for the benefit of a third party.
Indemnity insurance and contingency insurance
Indemnity insurance provides full financial cover if a particular situation occurs. For example, comprehensive accident insurance or fire insurance is an indemnity insurance which will pay for the full cost of damage (accident or fire) if the asset was fully insured.
Contingency insurance arises when the insurer promises to pay an agreed sum upon the occurrence of the contingent event (most common form is life insurance).
First party insurance and third-party insurance
First party insurance protects the insured from the damage that he will suffer if the event occurs. For example, in the case of fire insurance, the insured person protects his own property against the risk of fire in order to receive indemnity against his own loss.
Third party insurance provides compensation to third parties affected by the insured’s actions. This is the reason vehicle owners buy third party insurance under the Road Traffic Act. It provides for the injured person (third party) to claim against an insured vehicle.
Insurable interest
In order for the insured person to effect a valid insurance, he must have an insurable interest in the subject matter of the policy. The landmark decision of Lucena v Craufurd [1806] gave the definition of insurable interest as being ‘ a right in the property , or a right derivable out of some contract about property, which in either case may be lost upon some contingency affecting the possession or enjoyment of the party’. The lack of insurable interest in contract will render the contract void (under the Gaming Act 1845, and subsequent laws and statutes under common law). The clearest insurable interest is the ownership of the goods or property insured. We have to emphasize that the insurable interest must exist at the time of the loss, and therefore an expired interest or one that has not yet matured are insufficient.
The insurance contract
A contract of insurance is basically subjected to the same rules any other contract. It should satisfy the elements of a valid contract (offer, acceptance, consideration, etc.) already discussed under the Law of Contract. An insurance contract is a contract uberrimae fidei (in good faith) therefore the parties to the contract are under obligation to inform each other of all the matters relevant to the contract. It is important that the person seeking to get insured provides all the relevant information to enable the insurer decide whether or not to accept the insurance proposal and provide the insurance cover required.
Terms of the insurance contract
- Warranties are the most important terms in an insurance contract (unlike in other contracts), and their breach gives the insurer the option of rescinding the contract.
- Conditions are lesser terms in an insurance contract, the breach of which gives rise to an action for damages or the right to avoid liability for one particular claim.
- Terms descriptive of the risk: These are terms which add to the understanding of the risk insured but they don’t give rise to any remedy if breached.
Role of agents
Under law of agency, the agent acts on behalf of the principal (who is his employer) to ensure that the principal and third party enter into a contractual relationship. In insurance business (and indeed in other financial services business), companies use agencies to obtain business. It is important that the insured knows clearly the relationship between himself and insurer and the agent.
Subrogation
- In some situations, the insurer has rights to recover money from the insured…. in case he has been overcompensated and to enforce the rights of the insured against any 3rd party responsible for the loss.
- The insured, assuming that he had been fully covered, has a right to receive full indemnity for his losses – but does not have a right to be overcompensated. In the situation of overcompensation, the insurer has a right to recover money from the insured that is over and above full indemnity.
- The insured after paying full indemnity to the insured for his losses, may sue anyone whose negligence caused the loss so that the insurer recovers the amount that he paid to the insured as full indemnity.
