Insurance Law: An Introduction

Robert Merkin, Robert Merkin

• Publisher: Informa Law from Routledge
• Year: 2014
• ISBN:
  9781317912859
• Edition: 1
• Topic: Droit
• Subtopic: Droit financier

Insurance Law – An Introduction is essential reading and will provide you with a thorough understanding of all the main areas including motor, property, financial and marine insurance. The book contains the latest case law and best practice with reference to problem areas including fraudulent claims, third party rights against insurers and construing insurance terms. Comprehensive guidance on all key areas from the duty of utmost good faith to choice of law and jurisdictional issues is given by the leading legal experts in the insurance industry.

CHAPTER 1

AN INTRODUCTION TO INSURANCE AND INSURANCE LAW

Angus Rodger

This chapter begins with an introduction to insurance (including what it is and how it differs from wagering) before discussing some key aspects of English insurance law (contract formation, premium, privity, insurable interest, and rules relating to insurance intermediaries). Finally, it briefly describes the regulation of insurers in the U.K.

INTRODUCTION TO INSURANCE

The purpose of insurance

Insurance replaces the possibility that the insured will have to bear an occasional and uncertain loss itself with the certainty that the insured will pay a known amount (which may be much less than the potential loss) to the insurer. This reduces uncertainty, and may enable the insured to avoid severe losses which could be very worrying or even catastrophic.

For example, homeowners take out insurance to protect themselves against the serious (but remote) risk that their home might be destroyed or seriously damaged by fire, flood or other perils. By purchasing insurance cover, homeowners transfer the economic risk of such an event to an insurance company.

The insurance company will have many other homeowners who also buy insurance cover against such risks. The insurer will pool the premiums received, and will use them to pay the claims of the few insureds whose homes actually do suffer damage.

In this way, all of the insureds in effect contribute to bearing the losses of the few who would (in the absence of insurance) have been in the extremely difficult situation of bearing the loss themselves. Thus, insureds are replacing the (probably) small possibility of having to bear a large loss with the certainty of paying a relatively small sum to their insurers: in essence, they are buying “peace of mind”.

The insurer may wish, in turn, to transfer some or all of the risks which it has assumed from itself to other insurers by buying insurance for itself, known as “reinsurance”. For example, an insurer which specialises in covering homes in the Caribbean might wish to take out reinsurance specifically to cover the exceptionally high losses which it would incur in the event of a large hurricane devastating the whole territory in which it carries on business.

Classification of insurance business

Insurance can cover a huge range of risks. By way of example, a few common types of insurance are:

(i) political risks (for example, the risk that an insured's property will be confiscated, expropriated or nationalised by a foreign government);

(ii) kidnap and ransom;

(iii) fine art insurance;

(iv) fidelity (insurance taken out by a business against the risk of loss from dishonesty of its employees);

(v) directors & officers (“D&O”) insurance, where company directors are insured against the risk of being sued by shareholders and others for breach of their duties as directors; and

(vi) errors & omissions (“E&O”) insurance, where professionals are insured against the risk of being held liable for negligence.

Insurance business is often categorised into either “casualty” or “property”. Casualty insurance (also known as liability insurance) reimburses an insured for amounts which it becomes liable to pay to third parties, for example because a judgment has been given to the third party finding that the insured was negligent. Property insurance covers an insured for loss of, or damage to, property in which the insured has an interest (for example, buildings owned by the insured).

Another way of classifying insurance contracts is into “life” and “non-life”. Life contracts include those which provide for the payout upon the occurrence of the insured's death or after a certain amount of time (and in many ways resemble investment contracts more than normal indemnity insurance contracts).

A further classification is into “marine” and “non-marine” insurance. Historically, a large part of the London insurance market has related to marine insurance, which focuses on the insurance of ships and their cargo.

Definition of an insurance contract

In English law there is no comprehensive definition of an insurance contract, but the leading definition is usually said to be that of Channell J. in Prudential Insurance Co. v. Commissioners of Inland Revenue [1904] 2 K.B. 658:

“for some consideration, usually but not necessarily in periodical payments called premiums, you secure to yourself some benefit, usually but not necessarily the payment of a sum of money, upon the happening of some event. Then the next thing that is necessary is that the event be one that involves some amount of uncertainty. There must be either uncertainty whether the event will ever happen or not, or if the event is one which must happen at some time there must be uncertainty as to the time at which it will happen. The remaining essential is that … the insurance must be against something. A contract which would otherwise be a mere wager may become an insurance by reason of the insured having an interest in the subject matter—that is to say, the uncertain event which is necessary to make the insurance amount to an insurance must be an event which is prima facie adverse to the interest of the insured. The insurance is to provide for the payment of a sum of money to meet the loss or detriment which will or may be suffered upon the happening of the event.”

Accordingly, a contract of insurance may be said to be a contract under which one person (the insurer) is legally bound to pay a sum of money or its equivalent to another person (the insured), upon the happening of a specified event involving some element of uncertainty as to whether it will occur (or, if it is certain to occur, as to when it will occur), and which event adversely affects the insured's interest in the subject matter of the insurance.

Insurance distinguished from wagering

The English courts do not enforce wagering contracts.¹ The classic definition of a wagering contract is as follows:

“A wagering contract is one by which two persons professing to hold opposite views touching the issue of a future uncertain event, mutually agree that, dependent on the determination of that event, one shall win from the other … a sum of money or other stake; neither of the contracting parties having any other interest in that contract other than the sum or stake he will so win or lose.”
Hawkins J. in Carlill v. Carbolic Smoke Ball Company [1893] 1 Q.B. 256 (C.A.)

In insurance, the insured takes out a policy because of the risk of loss. By contrast, in a wager, the only risk of loss is the risk that the insured will lose the payment which it has made under the contract: without the contract the party would have had no risk. Put another way, an insured has an interest in something (for example, property) and it buys insurance to protect that interest.

The indemnity principle

A further feature of an insurance contract is that the insurer's payment is intended to compensate the insured to the extent of his loss, and not to enable the insured to make a profit. This is sometimes called the “indemnity principle”. In Castellain v. Preston (1883) 11 Q.B.D. 380, 386, Brett L.J. said that “Indemnity is the controlling principle in insurance law”. Thus, the insurer usually contracts to indemnify the insured only for his actual loss. However, in practice the sum recovered by an insured from its insurer is often not a perfect indemnity. In particular:

(i) Excess/deductible/retention

Under most insurance policies, the insurer does not cover the first part of the loss. For example, a travel insurance policy may require the insured to bear the first £50 of any loss before the policy coverage cuts in. This sum is described variously as an “excess”, “deductible”, or “self-insured retention”. Insurers usually require there to be an excess because if the insured has some stake in preserving the subject matter of the insurance it may encourage the insured to take care of that subject matter and reduces the likelihood of loss.

(ii) Limit of liability

The coverage provided by the insurer under the contract will be subject to financial limits. Sometimes there will be a per claim limit as well as an overall limit applicable to all payments under the contract as a whole. For example, a travel policy might limit cover for stolen cash to £200, or a commercial liability policy might cover liabilities of an insured up to US$250 million per insured event and a maximum of US$500 million for all losses under the policy.

(iii) Valued policies

Under a valued policy, the insured and the insurer agree upon the value of the insured subject matter. When a loss occurs, the insurer then pays out the agreed sum without the need for the insured to quantify his actual loss. For example, if an insurance policy in respect of a ship states that it is a valued insurance policy and that the value of the ship is £10 million, then if the ship is destroyed the insurer would be required to pay £10 million: it would not be open to the insurer to argue that, because of a drop in value, the ship was now worth only £9 million.

The conclusiveness of the agreed valuation in a valued policy is confirmed by s. 27(3) of the Marine Insurance Act 1906, which provides:

“Subject to the provisions of this Act, and in the absence of fraud, the value fixed by the policy is, as between the insurer and insured, conclusive of the insurable value of the subject intended to be insured, whether the loss be total or partial.”

However, most policies are not valued policies.

(iv) “New for old” policies

Another situation in which the insured receives more than a true indemnity for his loss is where the policy provides “new for old” coverage. Under such a policy, the insured may...

Table of contents

• Cover
• Half Title
• Related Titles
• Title Page
• Copyright Page
• Preace
• Author's Biographies
• Table of Contents
• Table of Cases
• Table of Legislation, Conventions and Rules
• 1. An Introduction to Insurance and Insurance Law
• 2. Utmost Good Faith
• 3. Terms of Insurance Agreements
• 4. Measure of Indemnity
• 5. Claims
• 6. Subrogation, Contribution and Reinstatement
• 7. Marine Insurance
• 8. Property and Financial Insurance
• 9. Motor and Other Liability Insurance
• 10. Choice of Law and Jurisdictional Issues
• Answers to Test Your Understanding Questions