The Six Principles in Insurance

Property may be defined as anything which has a value assigned to it, both tangible and intangible. However intangible property such as copyright are not generally insurable under property insurance since this policy caters for property which can experience physical loss or damage by fortuity.

There are six principles in insurance:

1. Utmost Good Faith
2. Insurable Interest
3. Proximate Cause
4. Indemnity
5. Subrogation
6. Contribution

1.0 Utmost Good Faith

Utmost Good Faith (‘Uberrima Fides’) opposite of ‘Caveat Emptor’ (let the buyer beware) is fundamental to the buying and selling of insurance. The insurer and the proposer have the obligation to deal honestly and openly amongst themselves in the negotiations that lead up to the formation of the contract.

Condition 6 of MSI policy – Alternation, emphasizes that any changes made to the risk insured must be revealed, otherwise insurers will be permitted to avoid liability. Also the MSI policy underlines that any misdescription and fraud will make the policy voidable:

‘… the Company shall not be liable upon this Policy so far as it relates to property affected by any such misdescription, misrepresentation or omission [1] .’

Furthermore:

‘If the claim be in any respect fraudulent or if any false declaration be made or used in support thereof …all benefit under this Policy shall be forfeited [2] ’.

In Joseph Muscat v. Joseph Gasan et noe (1998) [3] , which concerned a claim of a loss of a ring, the insurers refused to meet the claim due to misrepresentation and non-disclosure, which made the policy invalid. However the case was later revised and was concluded that the principle of ‘Uberrima Fides’ lies also in the hands of the insurer.

Moreover, in Antonio Zammit v. Joseph Micallef ne (1952) [4] , the insured gave false declarations, thus invalidates the policy. The insurers were not liable to indemnify the plaintiff since ‘fraus omina corrumpit [5] ’, in Latin.

From Kettlewell v. Refuge Assurance (1908) [6] we see that misrepresentation on part of the insurers is also likely.

In insurance there is a positive duty of disclosure, this origin is found in the case of Carter v. Boehm (1766) [7] :

‘The special facts, upon which the contingent chance is to be computed, lie most commonly in the knowledge of the insured only: the underwriter trusts to his representation, and proceeds upon the confidence that he does not keep back any circumstances in his knowledge, to mislead the underwriter into a belief that the circumstance does not exist, and to induce him to estimate the risk as if it did not exist [8] .’

Furthermore, in Rozanes v. Bowen (1928):

‘As the underwriter knows nothing and the man who comes to him to ask him to insure knows everything, it is the duty of the assured … to make a full disclosure to the underwriter without being asked of all the material circumstances [9] .’

Both cases quoted above underline the fact that the policyholder will know more information about the risk insured than the insurer. Consequently the judgement presumes that the insurer will not be able to find out the full details related to the risk, unless the proposer volunteers the required information.

The principle of ‘Uberrima Fides’ imposes the:

Insurer to disclose all applicable information and advice

Insured to disclose all material facts. ‘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’ [10] .

Examples of material facts needed to be disclosed in relation to property insurance:

Those representing a greater exposure than expected– Example: A garage having vintage cars

Outside factors making risk greater– Example: Property situated next to a fire factory or valley

Previous losses and claims

Declinature

Existence of other policies– Condition 3 of MSI policy, Other Insurances, highlights the duty of the insured to give notice of any existent insurance policies

Full facts related to description of the risk insured– Example: Construction and age of building, number of rooms etc

Restriction of subrogation rights– If both, Waiver of Subrogation and Hold Harmless exist in the contract, the insurer cannot sew the guilty party on the behalf of the policyholder.

Like Uberrima Fides, the principle of Insurable Interest is not applicable only to Property Insurance.

2. Insurable Interest

‘The legal right to insure arising out of a financial relationship recognized at law, between the insured and the subject matter of insurance [11] .’

The essentials for insurable interest are:

• Subject matter of insurance– Example of insurable interest is the interest which an individual has in the property which he owns
• The insured must own an economic or financial interest whereby he will experience a financial loss if such loss occurs
• The interest must be a legal interest– In the following case, Macaura v. Northern Assurance Co. Ltd (1925) [12] , insurers refused to meet the claim on the grounds that Macaura had no insurable interest
• The interest must be a current interest, not a mere expectancy – The expectation of something in the future does not create insurable interest (Lucena v. Craufurd (1806) [13] ).

Examples of persons having insurable interest in property include:

Absolute or real owners

Shared or joint owners

Mortgages and mortgagors– The mortgagor’s (purchaser) interest arises from the ownership of the property and the mortgage (usually a bank or a financial institution – lender) acquires an insurable interest since the property is the security for the loan

Executors and trustee– These are legally responsible for the property in their charge

Landlord and tenant– A landlord (lessor) has an insurable interest in the property that he owns, also his tenant (lessee) has an insurable interest since he may be responsible to pay for repairs if the property experiences damage, and may have to pay the rent even when the premises are unoccupied

Bailees– The bailee example a TV repairer have to take reasonable care of the clients’ goods as if they were his

People living together– Such as a spouse will have an insurable interest in the property belonging to the other if its use and ownership is shared

Finders and people in possession

Partners in a business

Creditor in the life of a debtor.

In Bartolo Wood Turners Ltd. v. Middle Sea Insurance Plc (2007) [14] , the insured property (a factory) was damaged by fire. The insurers settled the claim for the damages caused, however refused to pay for the damages made to the huts. Consequently, John Bartolo presented the claim to the Court. The insurers stated that there no was insurable interest in the huts, since they were the property of the M.D.C.

‘Irrizulta li s-socjeta’ attrici ma kienitx il-propjetarja tal-bini izda dan kien mikri lilha.’

The Judgement concluded that payment was to be made to the real owners of the premises, thus to the M.D.C.

3. Proximate Cause

‘The active, efficient cause that set in motion a train of events, which brings about a result, without the intervention of any force started and working actively from a new and independent source [15] ’, Pawsey v. Scottish Union and National (1907).

Sometimes there is more than one cause, in which case, the most dominant cause is outlined and determined (‘Leyland Shipping v. Norwich Union Fire Insurance Society Ltd (1918) [16] ). Unless the cause is identified, the claim cannot be settled.

In the case of Winicofsky v. Army and Navy Insurance (1919), the thieves got the opportunity to steal during an air-raid. The proximate cause was held to be the theft itself (an insured peril) and not the air-raid (an excluded peril).

In Emanual Micallef v Theresa Falzon (1973) [17] a road accident took place, where the defendant crashed in the applicant’s car as to not hit the pedestrians who had unexpectedly crossed the street in front of her. This is a case where the Court was faced in establishing what the proximate cause effectively was. The Court stated:

‘…qieghed jigi ritenut li l-konvenuta dahlet fil-“car” ta’ l-attur biex tevita lin-nies li kienu qeghdin jaqsmulha; allura lill-konvenuta ma jista’ jigi attribute l-ebda tort.’

Once it is clear that the causa proxima is covered by the policy, it will then be essential to calculate the loss and decide how much the Company is liable to pay. At this point the principle of indemnity will take control.

4. Indemnity

Placing the insured, as nearly as possible, in an equal financial position after a loss, as that occupied immediately before the happening of the insured event. This implies that the insured should not be over-compensated; neither makes a profit out of the loss.

The calculation of indemnity as regards to property is agreed not by its cost but by its value at the date and place of loss. Hence, if the value during the policy period has increased then the policyholder is entitled to an indemnity on the basis of the increased value subject to the sum insured (Re Wilson and Scottish Insurance (1920)) and vice-versa.

Under property insurance, the policyholder can regain the amount of the value of the property itself, thus cannot claim for:

Loss of perspective profits or losses unless they are specifically insured. In the case of Re Wright and Pole (1834), the insured cannot recover under a fire policy for loss of trade and cost of hiring premises

Sentimental value (Richard Aubrey Film Productions Ltd v. Graham (1960) [18] )

As regards to the basis of settlements, MSI Policy states that ‘the amount payable … shall be the cost of replacement after deductions being made for wear and tear or depreciation [19] ’.

Indemnity is however subject to: –

Policy limitations:

The sum insured is often the maximum recovery possible

Single article limits

Average is applied in the case of under-insurance. MSI Policy states: ‘… any destruction of or damage to such property … of greater value than the sum insured thereon, then the Insured shall be considered as being his own insurer for the difference and shall bear a rateable proportion of the loss accordingly [20] ’

Average

=

Sum Insured

×

Loss

Value at Risk

Excesses, deductibles or franchise

Other possible settlements:

‘New for Old’: Insurers agree to pay the full replacement cost ‘as new’, with no deduction for depreciation and wear and tear

Reinstatement: As stated in the MSI Policy ‘The Company may at its option reinstate or replace the property damaged or destroyed or any part thereof … [21] ‘

Agreed Value: The parties agree that in the event of a loss an agreed sum will be paid, regardless of the actual value of the property at that time. Works of art are frequently insured in an agreed basis.

In the judgement of Mario Misfud v. Montaldo Insurance Agency Limited Noe (2004) [22] , the plaintiff after purchasing a new car had a road accident. The claim was presented to court due to the fact that the claimant argued that he should receive the full amount of the vehicle without any deductions made for depreciation, since the vehicle was on road for only 20 days. With reference to the indemnity principle, the Court concluded that the costs should be borne by the Company, without any deductions for depreciation.

Connected to the principle of indemnity are the principles of subrogation and contribution which are sometimes described as corollaries of the principle of indemnity.

5. Subrogation

‘The right of one person, having indemnified another under a legal obligation to do so, to stand in the place of that other and avail himself of all the rights and remedies of that other, whether already enforced or not [23] ’. This is also highlighted in the MSI Policy, where the Company shall be entitled to subrogate upon its payments made for any loss or damaged occurred.

Brett, L.J. in Castellain v. Preston (1883) underlined that the main aim of subrogation is to ensure that the insured person obtains an indemnity but “no more than an indemnity”. In addition, the Company is not entitled to recover more than they have paid and should pay any profits to their policyholder.

Subrogation does not apply to non-indemnity contracts and when payments are paid on ‘ex-gratia’ basis or in situations where the policyholder receives gifts or charitable donations following his loss.

Subrogation operates:

• By means of Tort where a third party causes the insured loss or damage
• By means of Contract law where one party has rights against the other
• By means of Statute law where the insured is given certain legal rights (Riot Damages Act 1886)
• By means of salvage – Insurers are entitled for any salvage where they have agreed to pay the full amount of the loss, and if the item is later found the insured cannot oblige the insurer to return the item (Holmes v. Payne (1930)). This condition, in the MSI policy, is listed as ‘The Company’s Rights after Destruction or Damage. [24] ’

In the case of Scottish Union and National Insurance v. Davies (1970) the insurers claimed for £350, under the principle of subrogation, but failed on the grounds that the repairs they paid for were ineffective and no satisfaction note has been signed by the policyholder.

In the judgement of Citadel Insurance Plc Noe et v. Borg Jonathan (2009) [25] , a motor vehicle accident took place. After the insured (Magri Victor) had presented the claim, the Company had indemnified him. However, the Company failed to recover the costs from the third party (Borg Jonathan), thus the case had to be presented to court. The Court concluded that Borg Jonathan had to pay the insurer since he was responsible for the accident.

6. Contribution

‘The right of an insurer to call upon other similarly, but not necessarily equally, liable to the same insured to share the cost of an indemnity payment [26] ’.

This principle is applicable when there are two or more indemnity policies covering the same peril and subject matter. It is of utmost importance that the policyholder will inform the insurer of any other insurance in force otherwise, ‘all benefits under this Policy shall be forfeited [27] ’. In such a case the claim payment is shared amongst the insurers: ‘the Company shall not be liable to pay or contribute more than its proportion of such loss or damage [28] ’. If the policyholder holds more than one policy of insurance, he still cannot recover more than full indemnity.

For contribution to be applied the interest must be the same. In King and Queen Granaries (1877) both the bailees and the owners had insured the grain. The bailees’ insurers paid a claim following damage to the grain by fire and required to recover from the owners’ insurers. However they failed to do so, on the grounds that the interest insured by the two policies were different.

In addition different policies are needed example a fire and an accidental damage policy. In the situation where different policies cover different interest but the same subject matter, each of the concerned party may claim up to the loss he has experienced. The market agreement in UK decided to disregard the principle established in the King and Queen Granaries case, where the UK fire insurers have agreed to share certain losses even though the policies had different interests.

The insured may chose to settle his claim under one policy, since there is no circumstance that stops him from doing so. It is then the insurer’s duty to inherit the right of contribution against the second insurer. Yet, the Contribution Condition under the policy prohibits the policyholder from claiming under one policy.

Appendices

Case A

The case of Joseph Muscat v. Joseph Gasan et noe (1998) [29] concerned a claim for the amount of Lm3000 due to a loss of a diamond ring insured under an Accidental Damage Insurance Policy. The defendants refused to meet the claim on the basis of misrepresentation and non-disclosure of material facts by the insured, which made the policy voidable. The insurers (Gasan Insurance Agency Limited) stated that the insured (Joseph Muscat) had answered incorrectly a question in the proposal form as regards to previous convictions involving dishonesty. The insurers also claimed that the insured had failed to declare ‘that he was previously convicted of the offence of gaming and betting and had also been imprisoned for a term of eight days’. The Court rejected the claim for the insured since the latter facts were considered to be significant. Yet, this judgement was reversed and the Court concluded that the offences of which the applicant was convicted did not hold an offence concerning dishonesty and thus he was not requested to disclose such facts. Furthermore, the Court stated that the principle of ‘Uberrima Fides’ lies also in the hands of the insurer:

‘Fil-fehma ta’ din il-Qorti allura, kemm il-persuna assigurata kif ukoll is-socjeta assiguratrici kellhom l-obbligu mhux biss li jagixxu bl-aqwa bona fidi fil-konfront ta’ xulxin, imma wkoll l-obbligu li qabel ma jigi konkluz il-kuntratt ta’ assigurazzjoni jaccertaw ruhhom minn dawk l-elementi ta’ fatt li kienu rilevanti u materjali u li kienu jiddeterminaw il-volonta’ taghhom li jikkonkluduh. U daqs kemm kien indubbjament obbligat l-assigurat li jizvela dawk il-fatti lill-assiguratur taht piena ta’rexissjoni ta’ kuntratt, daqstant iehor l-assiguratur kien obbligat li itlob minn ghandu dik l-informazzjoni fuq fatti li fil-fehma tieghu kienu releventi u materjali’.

Case B

In Kettlewell v. Refuge Assurance (1908), the defendant’s fraudulent misrepresentation persuaded the claimant to pay the premiums for four years, after which she was untruthfully told that she would receive a ‘free’ policy. The Court concluded that the policyholder had the right to avoid the policy and to recoup the premiums paid since the date of misrepresentation.

Case C

In Carter v. Boehm (1766), Mr Carter, the Governor of Fort Marlborough, acquired an insurance policy ‘against the fort being taken by a foreign enemy [30] ’ together with Mr Boehm. A witness gave evidence that Mr Carter knew about the fact that the fort was build to resist attacks from citizens, not European from enemies, which at that time the French were likely to attack. ‘The French did attack’ and Mr Boehm declined to complete the claim. Mr Carter was sued on the basis of non-disclosure of material facts.

Case D

In the following case, Macaura v. Northern Assurance Co. Ltd (1925), Macaura had insured an amount of timber on his land under a fire policy. He had already sold the timber to a company of which he was the only shareholder. When the timber was damaged by fire the insurers refused to meet the claim on the basis that Macaura had no insurable interest in the assets of the company but only in his shares

Case E

In England, in Lucena v. Craufurd (1806); here the Crown Commissioners insured a number of rival ships which had been captured when ‘they were still on the high seas [31] ’. The authority of the Commissioners took control of the ships only when the vessels arrived at the port, subsequently the court believed that the Commissioners had no interest in the ships. Up until that point, they had only an expectancy of taking in charge of the vessels.

Case F

The following case, Leyland Shipping v. Norwich Union Fire Insurance Society Ltd (1918) [32] illustrates that the causa proxima may not necessarily be the last event to occur. The ship was insured under a policy that covered perils of the seas, however excluded war risks. The ship was hit by a torpedo and despite the severe damage it still reached the port, where repair work was started. When a storm blew up, the ship sank. The Court stated that the torpedo was the proximate cause of the loss since the damage it caused had been effective throughout.

Case G

In Richard Aubrey Film Productions Ltd v. Graham (1960), ‘a film producer insured against the loss of negatives and films [33] ’. When a film that was soon completed was stolen, the policyholder was entitled to recover only the market value of the film, less the cost of competing it. Though the film was described as ‘the child of his artistic creation [34] ’ and thus the policyholder was not permitted to recover anything on the grounds that his work reflects his personal value and feelings.