INTRODUCTION

The law relating to insurance is a mixture of common law and statute.

The general law of contract is relevant, but with special considerations arising in relation to insurance contracts.

The provision of insurance is a financial service regulated by the financial services legislation.

European Union law is of central relevance, and directly or indirectly influences new legislation on insurance matters.

Much of the history of insurance law relates to shipping, and to this day the development of shipping law and of the law of insurance are closely related.

Nature of insurance

In English Law the most cited definition of insurance is derived from the judgment of Channell J. in Prudential Insurance Company v Inland Revenue Commissioners [1904] 2 K.B. 658 at 663-664. A contract of insurance is one whereby one party (the insurer) promises, in return for a consideration (the premium), to pay to the other party (the insured) a sum of money or provide him with someone corresponding benefit, upon the occurrence of one or more specific events. There must be either uncertainty whether the event will 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. Generally it is a necessary part of making a recovery under a contract of insurance to prove that what caused the loss was a fortuity.

Contract of Indemnity

Insurance contracts may be divided into non-indemnity insurance and indemnity insurance. Non-indemnity insurance includes life and personal accident insurance where on the occurrence of an insured event the insured will be entitled to recover the amount set out in the policy. In indemnity insurance the insured is entitled to recover only the amount which he has lost and no more. The indemnity principle underlies the whole of this area of the law of insurance. Brett L.J. in Castellain v Preston (1883) 11 Q.B.D. 380 at 386 said:

“The very foundation, in my opinion, of every rule which has been applied to insurance law is this, namely, that the contract of insurance contained in a marine or fire policy is a contract of indemnity, and of indemnity only, and that this contract means that the assured, in case of a loss against which the policy has been made, shall be fully indemnified, but shall never be more than fully indemnified. That is the fundamental principle of insurance, and if ever a proposition is brought which is at variance with it, that is to say, which either will prevent the assured from obtaining a full indemnity, or which will give to the assured more than a full indemnity, that a proposition must certainly be wrong.”

The insured’s loss is limited by the sum insured but is not calculated by reference to that sum. The fact that an article is insured for a particular sum will only entitle the insured to that sum if he produces proof that the article was actually worth that sum unless, as is common in marine insurance, it is a valued policy entitling a claimant to recover the agreed value of the damaged property, see e.g. Quorum A/S v Schramm (Damage) [2002] 1 Lloyd’s Rep. 249 at 259 and following; see also Maurice v Goldsborough , Mort & Co Ltd [1939] A.C. 452 at 466-467; and Thor Navigation Inc v Ingosstrakh Insurance Company Ltd [2005] EWHC 19 (Comm), per Gloster J. at para.25. The pleader therefore needs to include in his particulars the value of the article or building lost or destroyed and not merely the sum insured. If there has been a recovery from a third party that sum needs to be brought into account (and pleaded) to reduce the sum claimed from the insurer, otherwise the indemnity will be breached.

Subrogation

It is convenient to deal with the subrogation immediately after the indemnity principle because the two are closely connected. The insured is not entitled to recover under his contract of insurance and also to recover his loss from a third party. Thus, as has been said above, if he has recovered part of his loss from that third party he must bring that sum into account to reduce his loss. Once the insurer has indemnified the insured that insurer can then stand in the shoes of the insured and exercise the rights, and obtain the remedies which would otherwise have been available to the insured: H Cousins & Co Ltd v D&C Carriers Ltd [1971] 2 Q.B. 230; and Castellain v Preston (1883) 11 Q.B.D. 380 at 388. Any subrogated claim brought by an insurer to recover from a third party the loss suffered as a result of indemnifying the insured must be brought by the insurer in the name of the insured: Mason v Sainsbury (1782) 3 Doug,. K.B. 61 at 63. The fact that it is in reality a claim brought by the insurer should not appear on the face of the statement of case. Should an insurer, having paid out a claim, thereafter discover that the insured has made a recovery from a third party or has, for example, recovered the goods, that insurer may bring an action in its own name against the insured at common law for monies had and received to recover the money paid out, to the extent that there has been recovery in excess of the indemnity principle: Yorkshire Insurance Co Ltd v Nisbet Shipping Co Ltd [1961] 2 W.L.R. 1043, per Diplock J. at 1049. Where subrogation is dealt with in the contract of insurance, an insurer seeking to assert its rights under that clause should specifically plead the old cases were revisited see Caledonia North Sea Ltd v British Telecommunications Plc [2002] Lloyd’s Rep. I.R. 261, particularly paras 11-16.

Insurable Interest

The insured must have an insurable interest in the event insured against. Insurance needs to be distinguished from a mere wagering contract where the risk is merely loss of the wager. Such contracts are void: s.18 of the Gaming Act 1845. The insured must plead the nature of the insurable interest held.

Utmost good faith

Contracts of insurance are contracts of the utmost good faith. This gives rise to a legal obligation upon the insured, prior to the contract being made, to disclose to the insurer all material facts and circumstances known to the insured which affect the risk being run Lord Mansfield’s words in Carter v Boehm (1766) Burr. 1905 have stood the test of time:

“Insurance is a contract of speculation. The special facts upon which the contingent chance is to be computed lie most commonly in the knowledge of the assured only; the underwriter trusts to his representation and proceeds upon confidence that he does not keep back any circumstances in his knowledge to mislead the underwriter into a belief that the circumstances does not exist and to induce him to estimate the risqué as if it did not exist. The keeping back such circumstances is a fraud, and therefore the policy is void. Although the suppression should happen through mistake, without any fraudulent intention, yet still the underwriter is deceived and the policy is void; because the risqué run is really different from the risk understood and intended to be run at the time of the agreement … The policy would be equally void against the underwriter if he concealed … The governing principle is applicable to all contracts and dealings. Good faith forbids either party, by concealing what he privately knows to draw the other into a bargain from his ignorance of the fact and his believing the contrary …”

The obligation of good faith is mutual and owed by the insurer as well as the insured and if it not observed by either party, the contract may be avoided by the other party: Carter v Boehm (above) and Banque Kayser Saturday v Skandia (UK) Insurance Company Ltd [1990] I.Q.B. 665 at 770F-G (affirmed [1991] 2 A.C. 249, reversed on another ground). The legal basis of the obligation is not obvious and is perhaps best explained as “an incident of the contract of insurance” per Hobhouse J. in The Good Luck [1988] 1 Lloyd’s Rep. 514 at 546 (affirmed [1989] 2 Lloyd’s Rep. 238, per May L.J. at 264 reversed on other grounds [1992] 1 A.C. 233). It is settled law that the principles (given statutory form in the Marine Insurance Act 1906 ss.17-20) are equally applicable to marine and non-marine insurance, as they are to reinsurance: Pan Atlantic Insurance Co v Pine Top Insurance Co [1995] A.C. 501 at 518D-E and 554D-G and Highlands Insurance Co v Continental Insurance Co [1987] 1 Lloyd’s Rep. 109 at 113-114.

The defences of non-disclosure and misrepresentation are frequently run together. In a non-disclosure defence the burden is on the insurer to prove:

  • that a material circumstance, which was known to our ought in the ordinary course of his business to have been known to the insured and which was not known to and not deemed to be known to the insurer, was not disclosed; and/or
  • that a person acting as an agent to insure failed to disclose a material circumstance which was known to that agent or which ought in the ordinary course of business to have been known by him or ought to have been communicated to him but which was not known and not deemed to be known to the insurer: and
  • that the insurer was induced by the non-disclosure to write the risk on the relevant terms.

(See the Marine Insurance Act 1906 ss.18, 19,) Each of the parts in italics should be specifically pleaded in the insurer’s statement of case.

The test for materiality is set out in the Marine Insurance Act 1906 s.18(2):

“Every circumstance is material which would influence the judgment of a prudent insurer in fixing the premium or determining whether he will take the risk.”

Under the common law rule, the materiality of information is a question of fact, determined at the time that disclosure is due, by reference to the judgment of the prudent insurer. For the purpose of materiality is not necessary for the insurer to prove that he would not have written the risk or would have charged a higher premium. It is sufficient if the fact or circumstance not disclosed. Would have had an effect on the thought processes of the insurer in weighing up the risk: per Lord Mustill in Pan Atlantic Insurance Co v Pine Top Insurance Co [1995] A.C. 501 at 531.

It is also necessary for the individual insurer to prove that he was induced, as a matter of fact, by the non-disclosure, i.e. that, but for the non-disclosure, he would not have entered the particular contract, at all or on the same terms: Decorum Investments Ltd v Atkin (The Elena G) [2001] 2 Lloyd’s Rep. 378, per David Steel J. at 382.

In his response to the insurer’s statement of case alleging that the policy has been avoided on the grounds of non-disclosure, the insured, apart from challenging the various matters pleaded against him, may have available to him an answer by way of waiver at placing. Waiver may arise from the questions posed in a proposal form. If an insurer seeks certain limited information he may be deemed to have waived further or wider disclosure: Schoolman v Hall [1951] 1 Lloyd’s Rep. 139 per Asquith L.J. at 143. Thus a motor insurer who seeks three years’ claims history cannot complain if various claims made four years earlier are not disclosed, even though they might otherwise have been material to the risk.

The insurer’s remedy for non-disclosure and/or misrepresentation is a right to avoid the policy. In the absence of fraud on the part of the insured, the insured is entitled to return of the premium on avoidance: Marine Insurance Act 1906 s.84(1); Tyrie v Fletcher (1777) 2 Cowp. 666 at 668, per Lord Mansfield and Anderson v Thornton (1853) 8 Ex. 425 per Parke B. at 428-429. There is no right to damages for breach of duty of good faith but only a right to avoid the policy: Banque Keyser SA v Skandia (UK) Insurance Company Ltd [1990] Q.B. 665, CA at 774-781.

If an insurer with full knowledge of a material non-disclosure or misrepresentation on the part of an insured does an unequivocal act affirming the contract of insurance or waiving the non-disclosure or misrepresentation, for example, by paying a claim, he will not thereafter be able to rely on the non-disclosure: see Container Transport International v Oceanus Mutual Underwriting Association (Bermuda) Ltd (No. 1) [1984] 1 Lloyd’s Rep. 46, per Kerr L.J. at 498 and Stephenson L.J. at 529 and The Kanchenjunga [1990] 1 Lloyd’s Rep. 391, per Lord Goff at 398-399. On the distinction between waiver by election and waiver by estoppel, see now Kosmar Villa Holidays Plc v Trustees of Syndicate 1243 [2008] EWCA Civ 147; [2008] 2 All E.R. (Comm) 14 (paras 36-38). In Lexington Insurance Co v Multinacional de Seguros Saturday [2009] 1 All E.R. (Comm) 35 (paras 61-68) it was held that no waiver by election had occurred where the reinsurers were not presented with a choice between two mutually inconsistent rights.