INSURANCE LAW NOTES.

SEPT/DEC 2024 - M.J OKUMU.

PARTIES TO A CONTRACT OF INSURANCE.

the parties to a contract of insurance are many but in an order of importance, they can be placed as:

a) the insurer - this is the party undertaking to identify and indemnify/compensate the purchaser of the
insurance risk. These insurers can be identified as companies that are registered to undertake insurance
business.

The Insurance Act of KE, Cap 487, provides that nbd shall be registered to provide insurance biz unless
it's a body corporate and is incorporated under the Companies Act w/shares paid and held by KE citizens.

The minimum capital initially was 50million KES. his has since been reviewed to over 1 billion depending
on the classs of biz being transacted i.e general, life or medical.

For an insurer to carry on biz in KE, it must be licensed by (prev. Commisioner of Insurance) but currently
CEO of the IRA.

As of 2023, there are over 41 licensed Ins. companies licensed to conduct insurance biz in KE. Such firms
include; AMACO, Britam, ICEA Lion, Madison, Prudential, UAP Old Mutual, Allianz,
Heritage/Liberty, Sanlam, CIC etc.

Obligations of the insurer.

1. To inform the insurer on the rules of their insurance.

2. Where the risk has reduced, the insurer is expected to reduce the policy.

3. Indemnify the insured in case of loss.

4. Investigate and settle.

5. Defend the insurer in a matter of litigation.

b) the insured - this is the one who purchases the insurance cover/contract from the insurer at a
consideration known as the premium.

In order for an insured to purchase the cover, the insured must 1st and foremost have insurable interest
and a risk. A lack of insurable interest will make a contract void. The insured can be a person, institution,
group of either, or even a 3rd party/guardian.

Obligations of the insured.

1. Give full description of the risk and must disclose all material facts of the risk before the contract
is concluded.

2. The insured must pay a premium.

3. Notify the insurance co. when a loss occurs.

4. At the end of the term of the policy, the insured is expected to renew the contract.
c) insurance agents - an individual/company given the power to act for the principal and the principal is
bound by the acts of the agent. The are 2 types; general & specific. As for general... they're authorised to
perform several specific businesses on behalf while a specific agent performs a specific act only, in an
agency r/ship, if there's an act outside the scope, he acquires authority, and if authority is not obtained,
the principal will not be bound. The Ins Act defines an agent as sbd, no salary employment, but who is
appreciated by commission.

They usually procure the business from an insurance company or two, a typical agent of insurance law
was deemed to be an agent of the proposer. This position was justified because it is the proposer who
contols all info relating to the subject matter of insurance & is important that all this info is disclosed.

Where an agent acts fraudulently, heis deemed to be the insurance's agent, in the case of Karanja v
Phoenix of EA Co., the plaintiff had sued the defendant seeking a declaration entitling him to
compensation by the insurance company, the plaintiff claimed he had been approached by an agent;
Sotik Agencies and a policy was issued in the name of the insurance company. They claimed that the
policy had been lost and couldn't be found. The court held that Sotik Agencies were acting as agents of
the defendants and not the plaintiff and that the act was within scope and authority and that the
contract couldn't seize just because the agent was fraudulent

d) insurance brokers - a legal agent of the insured engaged in arranging insurance. He is free to deal
w/any insurer accepting biz. He cannot bind or be bond by an insurer unless they have an agreement
placed through a document called a brokerage seal/risk note, prepped by the broker in placing the biz. It
must also be licesnsed by the IRA. biggest diff. btwn agents & brokers, is when there is misinterpretation,
a broker may void the contract.

There are about 200+ of them in KE.

RISKS.

There is no universally accepted definition of a risk. However, in insurance, it's a term used to refer to a
situation where there is uncertainty about an outcome, and when it occurs, it is most likely to be
unfavourable.

They are also referred to as a chance of loss, probability of loss and/or condition in which a possibiluty of
loss exists. On a personal level, a risk refers to a situation where a person hopes a risk will occur.

Generally, risk is a condition in which there is a possibility of an advance deviation from the desired
outcome.

Risks are also measured in terms of exposure and so, the higher the exposure, the higher the probability
of the risk occuring.

Risk defers from perils and hazards.

Classification of risks.

They can be classified into 6 broad categories:

1. Pure and speculative; these are those situations that will result in 2 outcomes - there will be a
loss or no loss. e.g life insurance.
 Speculative risks refers to circumstances in which there is a possibility of loss or gain e.g those
who buy stocks

2. Fundamental and particular; fundamental refers to losses that involve losses of personal nature
and impact involves many people. e.g war, inflation, natural occurences.
Particular risks have their origin from individual occurences and their effects felt within the local
community e.g property theft.

3. Financial & non-financial risks; financial risks involve where there is loss of money whereas the
opposite refers to those with no loss of money.

4. Static and dynamic risks; a risk is dynamic if there are changes in the economy e.g changes in
income.
Static are those that occur whether there are changes in the economy or not, they do not affect
society but individuals such as perils of nature, dishonesty by individuals

5. Pure risks:

a. property risk; risks born by people who have interest in their property e.g a home owner.

b. business risk; these relate to business entities and relate to financial losses that may arise
from the business firm.

c. personal risk; these are for individuals.

d. liability risks; they refer to damage caused to persons or property and involve negligence.

e. risks arising from failures of others; arise where a party has failed to fulfil their obligation
within time.

How are insurance risks handled?

A. Risk Sharing.
forming an insurance co. where members/parties pool resources which can fund individuals
when a risk occurs.

B. Risk Transfer.
one person takes the risk and promises to pay a premium and insurance

C. Non-insurance.
the person retains the risk

D. Risk avoidance.
outright refusal to accept a risk and is accomplished by disengaging in activities that cause a risk.

E. Risk reduction.
the person takes a positive step to reduce the risk and exposure. In these circumstances, the
insured has opportunity to bargain and secure safety of the risk.

Exceptions to insurance policies.

1. losses or claims caused by willful misconduct

2. losses caused by odinary nature of risk

3. inherent condition of that risk

What happens at the time of loss?(When the risk takes place)

3 things are considered:

1. Events before insurance cover is taken

2. The events after

3. Events when the risk takes place

When a risk takes place before the policy has been effected, then there's no loss that can be recovered.

When the risk takes place when the policy is in force, then the insurer is expected to compensate the
insured.

When a risk takes place when the policy has expired, then the loss can't be recovered.

The insurance policy covers all losses that are disclosed during the policy period and must have been
reported to the insurer.

FORMATION OF INSURANCE CONTRACTS.

A contract of insurance refers to the r/ship btwn 2 parties; the insurer and insured.

It must satisfy the basic requirements of a contract under contract law but not all necessary terms
should be agreed.

The following are important ingredients in a contract of insurance:

a. There must be a clear agreement as to the distinct features of a particular contract for instance
type of insurance being purchased.

b. The parties to the contract must be known with both parties in agreement to enter the contract.

c. There must be consensus at inception regarding the subject matter being insured.

d. There must be an agreement on the period of insurance which must be fixed at the beginning.

e. There must've been an agreement for premium or consideration to be paid.

f. There muist be an offer by 1 party to which it must be equally accepted by the other party.

These details should be recorded beforehand in docs such as: proposal form, cover note & policy.

Not all insurance policies must be in a written doc except marine insurance.

A. Offer.

To constitute an offer capable of being accepted, the following conditions must be fulfilled:

i. The offer being made in a proposal form which vary according to nature of insurance being
processed.
The forms have qns to which the insured is required to answer and are framed depending on the
class of insurance being proposed.
The qns seek to clarify and classify the insurance proposed via the following lines:
 a. description of the insured

b. descripition of the risk being proposed

c. previous history of the proposed risk or of the insurer

d. particulars of the risk e.g name, location, address, occupation & residence.

The proposal form provides the insurer w/material facts to which they make a fair decision on
whether or not to accept the risk and if accepted, the amount of premium to be paid.

The submission of the form constitutes the offer to the insurer and if accepted, the contractual
r/ship exists.

If the proposal is amended, then the terms of ammendment must be communicated by the
proposer to the other partner.

The proposal form indicates the terms the proposer intends to purchase in the cover.

Effects of a proposal form:

1. Once completed and signed by the proposed, it operates as a formal offer.

2. The form originates from the insured and once accepted, the insurers are bound to
accept and issue the insurance policy in accordance with the proposal.

i. via cover note.

They are issued by the insurers as a practice to confirm existence of the insurance proposal
between the parties once the proposal has been received via agents or brokers.

These covers operate between the time the proposal is made and when the final decision is
made by the insurer to give the proposer the cover intended to be purchased.

It is therefore a technical term to describe the temporary insurance cover period between
proposal and acceptance e.g for motor insurance - 14 days and 30 days for non-motor insurance.

However in the motor insurance, the cover takes effect immediately to protect the insured
against compulsory nature of motor insurance requirements.

It operates as a cover between the parties on the T&Cs applied for.

If the insurer declines to take the risk, refusal must be communicated to the proposer so as to an
end the effect of the cover note.

A cover note is in itself a contract of insurance and governs the rights and liabilities of parties in
the event of a loss taking place.

To get benefits, one must have complied with the conditions e.g paying premiums.

B. Acceptance.

There is no acceptance in insurance as long as terms are still in discussion and the premium remains to
be fixed and therefore, the offer is only complete when acceptance is confirmed and terms agreed.

If acceptance by insurer proposes new terms other than the ones already proposed, then there will be
no contract even if the policy was issued. If so, the new form of acceptance is equivalent to a counter-
offer that must be accepted by both parties before they become binding.

Methods of acceptance ->

1. Formal Communication.
This is confirmation by the insurer to the proposer.
Cunning vs Hoare (1885) 14 TLR 526
In this case, a letter formally accepting the proposal contained a notice that no insurance was
effective until the premium was paid.
This means that the proposal date and acceptance had to be disclosed.

2. Issuing of a policy.
The date of the policy becomes the date of issuance of the policy.
There are 2 exceptions: if the insured continues to ask for negotiation OR where the policy doc
has introduced new terms.

3. Conduct of an insurer.
The fact that the insurer hasn't communicated acceptance and hasn't issued a policy, it'll be
taken via his conduct that there is cover.

4. Payment of premium.
Acceptance and payment of premium give rise to presumption of acceptance of a proposal form.
The insurer isn't bound to deliver the policy without payment of the premium.

Effects of Acceptance->

1. Once acceptance is confirmed, then negotiations come to an end with regards to duty to
disclose.

2. The parties are bound and any withdrawal may be consented to.

3. The policy must be limited to the T&Cs of the type of policy.

4. The insured obtains obligations in which he has entered in a contract.

TERMINATION OF AN INSURANCE CONTRACT.

A. An insurance contract can be terminated by payment of the sum insured/compensation of the

total loss/damage when the risk occurs.

B. Agreement/consent - parties must have consensus and agree to the contract's termination.
In life insurance, the insured is entitled to 'Surrender Value' of the policy and under S89 of the
Insurance Act, the insured is entitled to at least 2/3 of the policy plus interest provided the policy
has been in force for at least 3 years.
In general insurance, the insured is entitled to refund of premium for the remainder of the
period provided there's been no claim.

C. Operation of the law.e.g policy needs to be liquified/subject matter is no longer present.

D. Breach of condition/warranty.
Condition will affect the whole contract while a warranty will affect only part of the contract.

INTERPRETATION OF AN INSURANCE CONTRACT.

Construction of an insurance policy is a qn usually left to the court. Where the judiciary has already
made an interpretation, it will remain so in subsequent places.
Where there's been no interpretation in the past. the court will generally be guided by certain principles
of general application just like in a contract and are meant to clarify intention of the parties.

Doctrine of precedents: generally where courts have already made a decision on words or phrases used
in a policy, then a decision under the doctrine will apply and similar interpretations will be used.

Glen v Lewis (1853)Ex 67: the courts stated that if a construction has already been put on a phrase in an
insurance policy, the same should be used in subsequent similar places.

Lowden v British Merchants Ins. Co. Ltd. (1961) LLoyds 155: in this case, the assured died in an accident,
under a motor policy, and there was no doubt that he was drunk at the time of accident. The insurer
sought to avoid liability on the grounds that he was driving under the influence to which it was an
express exclusion under the clause.

When the matter came to court, it was held that: since the words did not bear uncertainty in meaning
and effect, they had to be interpreted in similar manner as the past and the insurer was found not to be
liable.

The rules of interpretation are as follows:

i. Parties must have the same intention: to discourage the parties from speculation.

ii. The insurance policy must be interpreted as a whole:

Hamlyn v Crown Accidental Ins. Co.: the insured had taken a policy against injury caused by
accidental external visible means. A clause however exempted the insurer from liability in
respect o injury caused by natural diseases. During the period of cover, the insured stooped to
pick mangoes dropped by a child and dislocated his knee to which the company claimed that no
external injury had caused the accident. It was held that the injury would be ruled as one by
external means and would be covered as internal injuries were related to instances s.a disease.

iii. Ordinary meaning of words: as a general rule, words and phrases in an insurance policy should
be given their ordinary meaning.
Leo Rapp Ltd. vs McClure (1965) 1 Lloyds RCP 292: the insured had taken a policy for a stock of
metal against theft in a warehouse in the UK. Some stock were loaded into a lorry and it was
parked in an open yard in a locked compound topped w/barbed wire. Some of the stock was
stolen from the lorry.
It was held that, the loss wasn't covered under the policy as the compound didn't constitute a
warehouse thus showing interpretation by ordinary meaning.

iv. Ejusdem generis: where specification of similar things belong to the same group and they
precede a word of general significance... the latter words will be confined in meaning to belong
to the same group. Applied in circumstances where the insurance policy is non-exhaustive.
Kings & Travellers Association Ltd. (1931) 48 TLR 53: an insurance policy was taken against
accidental loss of baggage and was contained in a clause which stated jewellery, watches.
cameras and other fragile particles of value. When the insured sustained the loss, he included in
the lost items an item called a persian lamb coat which had not been specifically stated.

v. Written words must be given more effect than implied ones: express terms override implied
terms moreso where there's inconsistency because express terms will always give more quality
of the intention.

vi. Parole rule.

Other minor interpretation principles:

i. Words will be taken to mean what they say.

 ii. Interpretation will be taken as reasonable as will be preferred.

iii. Courts will try to bring peace/reconcile parties.

iv. Words are to be construed legally.

PRINCIPLES OF INSURANCE.
A. Insurable Interest.
This is the interest in pecuniary form at stake/in danger in the subject matter which is at risk if not
insured. The phrase refers to that which is likely to be lost if the loss occurs. It is therefore for that reason
that the insured is compelled to take an insurance policy.
Therefore, the insured in order to prove existence of insurable interest must exhibit that interest in the
subject matter of insurance at one time or during the period of the contract of insurance. If the insured
fails to show insurable interest, then the contract is invalid.
A person insured is deemed to have insurable interest in the subject matter of insurance if he stands to
suffer in the event of its loss/destruction. Insurable interest is therefore essentially the pecuniary interest
in danger.
Lusena v Crawford (1806) 2BOS PMR206: Justice Lauren said that - "To be interested in a thing is to be so
circumstanced with respect to benefit from its existence and prejudiced from its destruction."
There must be a direct r/ship between the insured and the subject matter and this relationship must
arise from a legal or equitable right.
As a general rule, insurable interest must have financial value of which need not be permanent or
continuing.
Insurable interest was also extended to cover under the Marine Act s94(1).
It is also a general rule that the insured isn't obliged to declare the nature and extent of insurable
interest in the subject matter. The description of the extent of insurable interest is to be given only
where the proposal form demands it.

The role of the insurable interest principle is where it confers upon the insured the locus standi to sue
on the policy.
Circumstances where insurable interest is expected->
1. Unlimited interest in family relationships e,g spouses and children
2. Contractual relationships
3. Creditor & debtor; principal and agent; bailor and bailee, partners and enterprises, mortgagor
and mortgagee, purchasers and sellers; lien holders.
Dably v India and London Life Insurance Company: in the case, it wasexplained that it was necessary for
the insured to have insurable interest at the time of effecting the policy. The claimant was a director of
the company which had taken the policy in the name of the insurer. The original policy was cancelled but
the claimant kept paying premiums until the insured died. At the time, of making claim , insurer
declined, claiming lack of insurab;e interest.
It was held: Under S3 of the Act, 1974, it required the insured to have interest at the time of effecting
the policy and not at the time of loss and therefore the insured was entitled to recover.
B. Utmost Good Faith (Uberrima Fides).
It's a duty which places the insured to disclose all material facts known to the insured to the underwriter
on the subject matter of the risk.
The underwriter trusts in that knowledge and proceeds in confidence to compute the premium payable
by the insured before effecting the policy.
If the duty to disclose, which is voluntary, is breached, then the policy becomes void.
The breach of this principle can arise out of misinterpretation where non-disclosure is confirmed where
the details disclosed are substantially false and the proposer is aware.
The details proposed are meant to induce the other party in to contract at their own terms.
Where there's non-disclosure and the contract is taken as void, then the insured forfeits the premium
paid.
Duty to disclose depends on the knowledge of the parties but both are to disclose material facts within
their knowledge. A fact isn't material if it would influence the judgement of a prudent insurer in fixing
the payment or whether or not to take the risk.
The materiality of a fact disclosed is determined via 2 tests->
i. S18(2) Marine Act -circumstances is material if it'll influence the judgement of an underwriter in
fixing the premium or declining or accepting the risk also known as the Prudent Insurer Test.
ii. Reasonable Insured Test: Horne v Poland (1922) 2KV 364 where the judge held that a fact is
material if a reasonable person would know that the underwriters would be influenced in
deciding whether to accept a risk and what premium to charge by those cirrcumstances and if
the proposer keeps them in ignorance/misleads them, it becomes part of the plaintiff's case
because the plaintiff was taking an insurance contract and he failed to take a duty to disclose
what a reasonable man would disclose.
Circumstances for non-disclosure->
• circumstances that reduce the risk.
• circumstances that are presumed or already known by the underwriter in their day to day
business.
• circumstances waived by the parties.
Time of disclosure->
The duty to disclose exists throughout the negotiation period of the insurance contract but before the
finalization of the policy. Material facts coming to their knowledge after need not be disclosed. After the
renewal of the policy, if circumstances change drastically,it's expected that the party with the knowledge
to inform the other, otherwise the duty to disclose continues during negotiation and concludes at
acceptance aand payment of premium.
Effects of non-disclosure->
It renders the contract voidable at the option of the innocent party, however, there's a higher burden of
disclosure on the insured part due to monopoly of the subject matter.
The doctrine has been used by insurers to escape liability on basis of non-disclosure of what had to be
disclosed. Unknown facts need not to be disclosed.
C. Indemnity.
Indemnity is a principle that ensures that in the event where the insured suffers a loss/damage, the
insurer will restore the insured to his/her former position before the damage. It is therefore the same as
restoration.
Castellain v Preston -> every contract of marine/fire insurance is a contract of indemnity and of
indemnity only the meaning of which is that the assured in case of loss will receive indemnity in full but
never receive more.
The insured shall only be indemnified but shall not receive more than the sum insured to which the
premium was paid.
There is an exception to this which is found in life policies. Why?
• ‘No amount of money is equal to life’.
• Premiums are paid over a long period of time w/interest.

What are the forms that indemnity takes in the insurance biz? (How insured is indemnified)
• Cash payment
• Repairs
• Replacements
• Reinstatement
How is indemnity computed? 2 ways:
• Total loss
• Partial loss
After the occurrence of the risk insured the insurance company will determine the basis of
compensation/indemnity. Where the subject matter of insurance is total loss, and the insurance has the
option to indemnify/compensate by payment of sum insured etc. whichever T&Cs already agreed upon
will apply provided that the insurance company will not pay insured more than the price of the
indemnity. For Replacement & Reinstatement, the terms must be agreed at inception and forms part of
the contract of insurance.
D. Subrogation.
It’s a doctrine which is founded on the indemnity principle and provides that the insured/insurer has the
right to be indemnified against loss by the responsible 3rd party who causes loss/damage. the insured is
allowed to by this principle to take up indemnity in their own name in the case of the insured. It’s noted
that subrogation is only comes in after the individuals has been indemnified by insurance company, and
is when the insurer takes over the legal right of the insured against the 3rd party. Thus, principle need not
be expressed in writing can be implied.
E. Contribution.
Like under subrogation, contribution is a coronary principle to indemnity. It is for stopping an insured
who chooses to insure the same subject matter with more than one insurer with the intention of
obtaining compensation from as many insurance companies to overcome indemnity. It provides that an
insured who chooses to insure with multiple insurers cannot be indemnified more than the loss. Unlike
subrogation, this is btwn the insurers themselves and NOT btwn the insured and insurers. Where 2 or
more insurers are involved, the liability is measured according to their maximum proportion received in
premiums of the sum insured.
F. Proximate Cause.
It requires that there be a close connection between the peril insured and the cause of loss. This
principle requires that the cause of loss must not be remote but must be the most efficient cause of the
peril for insurance liability to be admitted. It’s important for the insured to show that the loss not only
falls within the cover but that the loss was proximately caused by the insured peril. In establishing
proximate cause, it is a question depending on fact. It should be shown that the peril not only happened
but that it was the most immediate action so that causation is not a chain but the net.
Commercial Union Assurance v Havdem (1977) OB 804