GENERAL PRINCIPLES OF INSURANCE LAW

Apart from the principles governing all contracts insurance is also governed by its own unique principles.

INDEMNITY

• Is perhaps the most fundamental principle of insurance law. Object of indemnity is to place the insured after the loss in the same position he occupied immediately before the loss. He is not to be placed in a better or worse position.

• Not all insurance contracts are contracts of indemnity e.g. life insurance. Indemnity is important as it deals in part with moral hazard.

• Indemnity does not imply that the insured will be indemnified to the full value of his loss e.g. a person whose factory is destroyed by fire cannot recover for loss of profits or against any liability that may arise from the fire unless he has appropriate policies in place specifically designed to deal with these losses.

• Indemnity can be achieved through the following methods:

1. Cash

2. Reinstatement e.g. where a building is destroyed, insurers may reinstate it.

3. Repair e.g. where a motor vehicle is partially damaged.

4. Replacement-instead of paying cash a replacement item may be tendered.

5. New for old-used for household contents. This is not a violation of the principle of indemnity as there is no principle of law that requires indemnity to be determined in terms of the market value of the asset.

6.Valued policies-in terms of which the insurer and the insured agree before hand on the value to be paid should a particular asset be destroyed or stolen. This method of indemnity is used for assets with a sentimental rather than a commercial value e.g. jewellery, works of art etc.

• The principle of indemnity is supported by 2 corollaries namely-subrogation and contribution.

SUBROGATION
• Literally means “to stand in place of”. It is the right of one person to stand at law in the place of another and to avail him of all rights and remedies of that other person.
• Often when a claim occurs there may be 2 avenues of recovery. Suppose A drives negligently and causes an accident damaging B’s car. If B’s car is insured 2 options are open to him to recover his loss-he can sue A in delict
• for damages or he can claim from his insurer. If B pursues both avenues he will receive double compensation.
• To prevent B from profiting from his loss subrogation is used in terms of which once the insurer has paid B the insurer assumes all B’s rights to sue A. This ensures that the principle of indemnity is preserved.
• Subrogation has a number of sub-principles namely:
• The insurer cannot be subrogated to the insured’s right of action until it has paid the insured and made good the loss.
• The insurer can be subrogated only to actions which the insured would have brought himself.
• The insurer must not prejudice the insurer’s right of subrogation. Thus the insured may not compromise or renounce any right of action he has against the 3rd party if by doing so he could diminish his loss.
• Subrogation against the insurer. Just as insured cannot profit from his loss the insurer may not make a profit from the subrogation rights. The insurer is only entitled to recover the exact amount they paid as indemnity nothing more. If they recover more the balance should be given to the insured.
• Subrogation gives the insurer the right of salvage.

CONTRIBUTION
• Is another principle that aids indemnity. Often a person has more than one policy on the same asset. Following a loss the position of the 2 policies is governed by the principle of contribution. Since indemnity forbids the insured from recovering more than the loss then he cannot recover the full value of the loss from each of the 2 policies.
• NB the law does not forbid people from engaging in double insurance it only forbids profiting from a loss.
• Under the common law a person who has double insurance can look to any of the insurers involved for compensation. The insurer who would have paid can then claim contribution from the other insurer involved.
• It was held in American Surety Co of New York v Wrightson 1910 that for contribution to apply the 2 policies involved must cover-same interests; same assureds; same adventure; same risk; different or same amounts.
• Essentially for contribution to apply the following conditions must be met:
(1) The 2 policies must cover the same insured.
(2) They must cover the same subject matter.
(3) They must cover the same interest.
(4) The peril causing the loss must be covered by both policies albeit for different amounts.
(5) Both policies must be current.
• Normally the policies contribute pro-rata to the loss. In some markets the independent liability method is used to determine the levels of contribution. Under this method if the loss is within the sums insured of both policies they contribute equally to the loss.

AVERAGE
• Average is a concept used by insurers to deal with under-insurance. Under-insurance occurs when an item is insured for less than its market value.
• In terms of the common law the general rule is that a person who under-insures his property is entitled to the full amount of his loss whether total or partial subject to the limits of the policy in the absence of any provision in the policy to the contrary e.g. if a house worth R500 000 is insured for R300000 and a loss of R100 000 occurs the insured in the absence of an average clause in the policy would be entitled to R100 000. By implication therefore average is an alien concept to the common law.
• Reduced to its logical conclusion average entails that if there is under-insurance the insured shall be his own insurer to the extent of the under-insurance. This means the insured will bear part of the loss as a penalty for underinsurance.
• Because average is not recognized by the common law its application in insurance is not automatic. Insurer would have to include the average condition in the policy for average to apply.
In marine insurance the term average has a meaning to that ascribed to it in property. insurance In marine average may mean one of 2 things:
(1) General average sacrifice
(2) General average expenditure.
• The formula for average is: Sum insured/Market value x loss sustained.
• Average only applies to contracts of indemnity hence since life insurance contracts are not contracts of indemnity all concepts derived from indemnity like subrogation, contribution and average do not apply to life policies.
The rationale behind average is that the insured should pay a premium that is commensurate with the risk he introduces to the pool to avoid prejudicing other contributors.


INSURABLE INTEREST
• Insurable interest distinguishes contracts of insurance from gambling in order to define the legitimate area of insurance business.
• Insurable interest is required for all types of insurance and its absence renders the contract void and hence unenforceable.
The leading Roman-Dutch law case on insurable interest is Littlejohn v Norwich Union Fire Insurance Society 1905 TH 374 where it was held that if the insured can show that he stands to lose something of an appreciable commercial value by the destruction of the thing insured then his interest will be an insurable one. The Court went further to state that as a general rule insurable interest should exist at the time of taking the policy and at the time the loss is incurred.
If a person has insurable interest in an asset at the time of taking the policy but loses the interest thereafter e.g. if he sells the car, the policy ceases to have any validity.
• Insurable interest can be acquired in various ways notably:
(1) Ownership
(2) Legal possession
(3) Custody of property belonging to others e.g. bailees.
(4) Marriage-spouses have an insurable interest in each other’s life.
(5) A lien-holder has insurable interest in the property subject to the lien.
(6) A debt creates insurable interest between debtor and creditor.
(7) An employer has an insurable interest in the life of an employee.
• In life insurance the general rule is that insurable interest need only exist at the time of taking the policy. Thus if A who is married to B takes a life policy on his life and they later divorce the policy will pay on B’s death even if technically insurable interest no longer exists because the parties divorced.
• As far as insurable interest of parents in the lives of their children is concerned the position in SA is largely governed by legislation.


UTMOST GOOD FAITH (UBERRIMA FIDES) AND THE DUTY OF DISCLOSURE
• Insurance contracts are characterized by information asymmetries between the parties. Generally the insured knows more about the risk to be insured than the insurer. To rectify this imbalance the law compels disclosure of information between the parties.
• To act in good faith entails that parties must deal openly and honestly with each other without suppressing material facts that may influence the judgment of the other party.
The duty to act in good faith applies to all types of insurance contracts. In contracts of sale the maxim caveat vendito applies meaning let the buyer beware. This maxim places an obligation on the buyer to take all reasonable steps to verify that the item he intends to buy meets his expectations. In insurance this maxim does not apply.
• In England the doctrine of utmost good faith is incorporated in the Marine Insurance Act 1906.
• The requirement of utmost good faith is complimented by the duty of disclosure which places an obligation on both parties to the insurance contract to disclose material facts relevant to the contract to each other.
• In England the Marine Insurance Act 1906 defines a material fact as every circumstance that would influence the judgment of a prudent insurer in fixing the premium or determine whether he will take the risk. Hence in England a material fact is defined from the perspective of a prudent insurer. This can result in a heavy burden on the insured.
• In SA Courts have accepted the need for disclosure but have rejected the definition of materiality as used in English law.
• In Mutual and Federal Insurance Co v Oudshoorn Municipality 1985 1 SA 419 the Court rejected the expression uberrima fides as being alien to our law. The Court also went further to hold that the proper test of materiality should be the standard test of a reasonable man and not that of a prudent insurer.
• Failure to disclose material facts renders the contract void-able at the instance of the insurer. Of course the insured is only expected to disclose facts that he knows or ought to know.
• In life insurance facts commonly regarded as material include-medical history; financial status; family medical history; state of health; life style etc.
• In short term insurance common material facts would include-previous convictions; financial status; whether another insurer has cancelled insured’s policy in the past.
• Some facts though material need not be disclosed. Thus the insured has no obligation to disclose the following facts:
(1) Any circumstance that diminishes the risk.
(2) Any fact known or presumed to be known by the insurer.
(3) Facts on which insurers have waived information.
• The duty of disclosure lasts for the duration of the negotiations and terminates when the contract is concluded. Material facts that come to light after the contract has been concluded are deemed to be part of the risk that the insurer would have assumed.
• Naturally in short-term contracts the duty to disclose material facts is revived at renewal of the policy. Life insurance contracts are continuing contracts hence the duty to disclose is not revived unless there is a specific duty in the policy obliging the insured to do so.
• To avoid liability on grounds of non-disclosure the onus is on the insurer to prove that:
(1) The undisclosed facts were material.
(2) That the facts were within the actual or presumed knowledge of the insured.
(3) That the facts were not communicated to the insurer.
• Upon discovering the non-disclosure the insurer must exercise the right to repudiate the contract within a reasonable time. Thus if upon discovering the non-disclosure the insurer continues to accept the premium for example, the insurer would be deemed to have waived the right to repudiate and the contract will be binding as if there was no non-disclosure.
• In summary therefore the duty of disclosure is justified on the following grounds:
(1) There is information asymmetry between the insured and the insurer. The insured knows more about the risk than the insurer hence the law must compel disclosure.
(2) Without the duty of disclosure the insurance market cannot operate efficiently such that the supply side of insurance can be disrupted.
(3) Disclosure enables the insurer to quantify and price the risk appropriately.
(4) Disclosure also enables the insurer to determine appropriate policy terms and conditions to be incorporated in the policy. It enables the insurer to determine the extent to which the risk being presented deviates from the norm.
(5) Disclosure also helps insurers manage the problem of adverse selection.
• On the other hand critics of the duty of disclosure point to the following in support of their argument:
(1) The duty is unduly burdensome on the insured depending on the test used to determine what constitutes material facts.
(2) Insurers rarely warn the insured about the consequences of non-disclosure.
(3) Given the current technological advances it is no longer true to say insurers know less about the risk than the insured. The reverse may well be true.
(4) The duty of disclosure may be abused by insurers seeking to avoid their obligations.
(5) There is an element of self-serving hypocrisy by insurers by insisting that facts that lessen the risk need not be disclosed yet these may benefit the insured by way of reduction of premium. Why are insurers only interested in the bad and not the good?

CAUSE OF LOSS-THE DOCTRINE OF PROXIMATE CAUSE.

• The general rule is that for a loss to be paid under a policy of insurance, it must have been caused by an insured peril. Unless the loss is proximately caused by an insured peril the policy does not respond.
• The proximate cause of loss is the most dominant and efficient cause in terms of bringing about a particular result.
• The onus of proving that the loss was proximately caused by an insured peril rests with the insured.
• In Etherington v Lancashire and Yorkshire Accidental Insurance Co (1909) a man fell from a horse and sustained injuries that prevented him from moving. As a result he contracted pneumonia due to lying in the wet and died. The proximate cause of his death was held to be the fall not pneumonia.
• Similarly if furniture is thrown out of a burning house to arrest the spread of the fire and its damaged in the process the proximate cause of the damage would be the fire.
• If the insured makes a prima-facie case that the loss was proximately caused by an insured peril the insurer is obliged to indemnify unless they can prove that an exception applies.

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