INSURANCE

A contract of insurance is a contract under which the insurer agrees in consideration of money
paid to him (premium), by the insured to indemnify the insured against any loss resulting to him
on the happening of a certain specific event.
The instruments which contains the terms and conditions of the contract of insurance is called
the policy and the loss insured against is the risk.
The main objective of an insurance contract is to indemnify the insured against the loss of some
kind or to pay a certain sum of money on the happening of a certain insured event.
The insurance is based on the principle of 'pooling of risks'. Many persons who are subject to a
particular risk contribute to a common fund. This fund is utilised to compensate those who
actually suffer the loss.

Insurance and Assurance:

The term insurance refers to events or incidents which may or may not occur e.g. fire, theft,
accidents and the like.

Assurance on the other hand refers to incidents which are bound to or that must happen, for
example; death, and old age.

Insurers and the Insured:

Insurers are the firms that undertake to protect other firms and people against losses. They
include friendly societies, insurance companies like Kenya National Assurance Company, Madison
Insurance the Government e.t.c.

Insured are those companies or persons who get the insurance policies from insurers. Insurers
give the protection against specific losses in consideration of some payment called premium.

The Policy:
On accepting the proposal, the insured is given a contractual document known as 'the policy'.
Usually it is issued before the expiry of cover note. It contains the undertaking by the insurer
that the policy holder shall be paid the sum assured on the happening of the specified event;
Besides, it contains all the terms necessary for the contract such as the name, address and
occupation of the insured, the subject matter of the insurance and the scope of the risk, the
period of insurance, the premium, the amount for which the risk is insured, It also contains the
general conditions governing the insurance such as the giving of notice of an event leading to a
claim, the information which has to be furnished in support of the claim, etc.

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Insurance Law:
There is no general Act relating to insurance in Kenya. But certain aspects of insurance are
covered by legislation e.g. The Motor Vehicles Third Party Risks Act (Cap. 405).
The third party motor vehicles insurance is compulsory in Kenya.
TYPES OF INSURANCE
Insurance business is divided into two main branches:
1. Life Insurance business.
2. General Insurance business.
General Insurance business means the, marine or miscellaneous insurance business. Items like
employer's liability insurance, burglary insurance, fidelity guarantee insurance, livestock
insurance, crop insurance, motor vehicles insurance, etc., fall under Miscellaneous insurance
business category.

(a) Life Insurance:

This is a contract whereby the insurer, in consideration of a certain premium, undertakes to pay
to the assured, or to the nominee/assignee or the legal successor (as the case may be) of the
assured in case of his death, a stated sum of money or annuity (i.e., payment in monthly, quarterly,
half-yearly or yearly instalment), on the death of the insured (the person whose life is insured) or
on the expiry of a certain period.

Major Policies of Life Assurance

Endowment Policy
Payment of premium is made for a specific period only with the insured becoming payable at the
expiry of a certain period or at the death whichever comes earlier.

Whole Life Policy

Requires payment of premiums throughout the life of the insured or for a specified period but the
sum assured is payable only after the death of the insured.

Many variations can be introduced to life policies. One such variation is a family income-benefit
clause in the policy. Under it if the holder of an endowment policy dies prematurely, his family will
receive a regular income for the remainder of the agreed numbers of years which the assurance
covered. Under the double accident benefit clause, twice the sum assured is paid if death has
been caused as a result of an accident and not of natural causes.

Surrender Value:
This is the money paid back to the insured party when he decides to cancel the insurance
agreement before the period specified. The surrender value is payable only in the case of policies
in respect of which at least a few years premium has been paid. The policy-holder can not get 100
per cent of the premiums already paid.

Paid-up Policy:
If owing to some reason the policy holder does not want to pay the future premiums he can
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request the insurance company to make such a rearrangement of the contract. Such a policy is
known as a paid-up policy. The amount to which the sum assured is reduced is known as the paid-up
value of the policy. A policy-holder can convert a policy into paid-up policy only if he has paid the
premiums for a minimum period.

Nomination:
Nomination means to nominate a person or persons to whom the assured amount may be paid in
case of the death of the assured person.
Assignment:
This is the act of transferring the title and interest into the policy to any other person.
Life insurance policies are freely assignable. It is necessary to give a notice of such assignment in
writing to the insurance company which must issue, a certificate acknowledging receipt of this
notice.

GENERAL INSURANCE
(a) Fire Insurance:
This is a contract by which the insurer underwriter undertakes to indemnify the other against any
loss or damage caused to the property insured in the event of fire in consideration of payment of
premium either in lump sum or instalments.
It is essential that the insured has insurable interests in the property inured otherwise the
contract is void.
Fire insurance is strictly a contract of indemnity in that the insured is entitled to the amount of
loss actually suffered but not more that the amount which thee insurance is effected.
A fire policy contains an average clause, which provides that the insured can only recover such
proportion of the loss caused by fire as the value of the policy bears to the value of the property
insured
Average clause is directed towards compelling fill insurance.
Illustration
Value of Property- 30 000
Value of Policy - 20 000
Damage - 15 000
Computation is as follows.
Amount Payable:-
Policy value Loss Suffered
Actual Value of Property

(b) Marine Insurance:

A contract of marine insurance is a contract whereby the insurer (also called the underwriter)
undertakes to indemnify the assured, against losses caused by perils of the sea. i.e. accidents
peculiar to ships and their cargo.
The term peril does not include wear and tear but includes losses arising from the storage and
such losses as may be occasioned by a sea vessel hitting a rock or by fire or pollution.

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Other perils covered include fraud, gross negligence on the part of the master, or crew.
War risks may be covered unless expressly excluded.
The insurer must have insurable interest in the cargo. Persons said to have insurable interests
include,
 A mortgagor of the ship
 Lenders of money on the security of the ship
Owners of the ship or cargo

Kinds of marine policies :

Voyage Policy:
This is where the owner of a ship insures it for a particular journey say from Mombasa to Bombay.

Time Policy:
This covers losses that may occur within a specified period say from the 1st January 2009 to 31st
December, 2009. Time policies do not usually exceed one year.

Floating Policy:
This covers losses on a particular route for a specified period. All ships of the insured traveling
along that route in that period are covered by this policy.

Mixed Policy:
This policy covers the risks for both a specified voyage and for a period of time:

Port Policy:
This policy covers the vessel for a period of time while in port. It includes Theft and Burglary:

(c) Bad Debts Insurance:

Bad Debts insurance protects traders against losses caused by failure of their customers to pay
their debts.

(d) Fidelity Insurance:

This protects the employer against financial loss caused by a specified employee handling cash,
for example, the cashier, a college bursar, an Accountant or Finance Manager.

( e) Employer's Accident Liability:

This safeguards the employer against damage caused by his negligence or mistakes to his workers.

(f) Motor Insurance:

This insurance covers vehicles damaged or lost in accidents. The motor insurance policies may be
also of diversified nature e.g. comprehensive policy, fire and theft policy and third party
insurance.

Under the Insurance (Motor Vehicles Third Party Risks) Act (Cap. 405) every driver of a motor
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vehicle is required to be insured against liability in respect of death of or bodily harm to any
person caused by the use of vehicle on the road. It is an offence to use a vehicle on the road
without having in force an insurance policy in respect of injuries to third parties.

(g) Professional Negligence Insurance

BASIC INSURANCE PRINCIPLES

1. UTMOST GOOD FAITH:

The general rule of 'caveat emptor' (let the buyer beware), which applies to ordinary trade
contracts, does not apply to insurance contracts. Insurance contracts are contracts of utmost
good faith or contracts umberimae fidei. Accordingly, it is the inherent duty of both parties to a
contract of insurance to make full and fair disclosure of all material facts relating to the
subject-matter of the proposed insurance. It is so because insurance shifts risk from one party
to another. A material fact for this purpose is a fact which would affect the judgement of a
prudent insurer in considering whether he would enter into a contract at all or enter into it at one
premium rate or another. For example, in life insurance suffering from a disease like asthma or
diabetes is a material fact whereas having occasionally a headache is not a material fact.

2. Indemnity:
Indemnity is the right of the insured to be compensated for the exact value of the loss.
Contracts of insurance, are contracts of indemnity, except those of life and personal accident
insurances where no money payment can indemnify for loss of life or bodily injury.
Thus in case of a loss against which the policy has been made, the assured shall be fully
indemnified but not more than that.

3. Insurable interest:
The insured must possess an insurable interest in the subject-matter of the insurance at the time
of contract, otherwise the contract of insurance will be a wagering agreement which shall be void
and unenforceable.

Insurable interest means some proprietary or pecuniary interest.

A person is said to have an insurable interest in the subject-matter insured where he will derive
pecuniary benefit from its existence or will suffer pecuniary loss from its destruction. Insurable
interest is thus a financial interest in the preservation of the subject-matter of insurance. A
purely sentimental interest or a non-monetary benefit will not cause an insurable interest.
 A person has insurable interest in his own life.
 A partner has insurable interest in his partner during the subsistence of the partnership.
 A husband has insurable interest in his wife and vice versa
 A creditor has insurable interest in his debtor to the extent of the debt.
 An employer has insurable interest in his employee while in his employment.

4. Doctrine of Proximate Cause (Causa proxima):

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In order to make the insurer liable for a loss, the nearest or immediate or last cause is to be
looked into, and if it is the peril insured against, the insured can recover.
Insurers are not liable for remote causes and remote consequence even if they belong to the
category of insured perils.
The question, which is the causa proxima of a loss, can only arise where there has been a
succession of causes.
Where a result has been brought about be two causes, one must, in insurance law, look to the
nearest cause, although the result would, no doubt, not have happened without the succession
cause. The law will not allow the assured to go back in the succession of causes to find out what is
the original cause of loss

Pink vs. Flaming (1899):

In a marine policy, the cargo was a shipment of oranges. The peril insured against was collision
with another ship. During the course of voyage the ship actually collided, resulting in delay and
mishandling of shipment which made orange unfit for human consumption.
Held: The loss was due to mishandling and delay and not due to collision, which was a remote cause,
though without it no mishandling or delay was necessary. As such the insurer was not held liable.
(For mishandling the crew and their principal could 'be made liable hut not the insurer).

Hamiltion vs. Pandrof (1877)

In a marine policy, the goods were insured against damage by sea-water. Some rats on board
bored a hole in zinc pipe in the bath which caused sea-water to pour out and damage the goods.
The underwriters contended that as they had not insured against the damage by rats, they were
not bound to pay.
Held: The proximate cause of damage being sea-water the insured was entitled to damages, the
rats being a remote cause.

In deciding whether the loss has arisen through any of the risks insured against, the proximate or
the last of the causes is to be looked into and others rejected. If loss is caused by the operation
of more than one peril simultaneously and if one of the perils is an excepted (i.e., uninsured) peril,
the insurer shall be liable to the extent of the effects of insured peril if it can be separately
ascertained. The insurer shall not be liable at all if the effects of insured peril and excepted peril
cannot be separated.

Although the principle applies mostly in the case of marine and fire insurances, it is applicable in
the life insurance as well because in 'personal accident policies' the proximate cause of the death
should be accident. In case of natural death the insurer is not liable thereon.

5. Risk must attach:

If the subject-matter of insurance ceases to exist (e.g., the goods are burnt) or the insured ship
has already arrived safely, at the time the policy is effected, the risk does not attach, and as a
consequence, the premium paid can be recovered from the insurers because the consideration for
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the premium has totally failed.
Thus, where the risk is never run, the consideration fails and therefore the premium is
returnable.
It being a general principle of law of insurance that 'if the insurers have never been on the risk,
they cannot be said to have earned the premium'.
The risk also does not attach and therefore the premium is returnable where a policy is declared
to be void ab initio on account of some defect, e.g., assured being minor or parties not being
ad-idem. But where a policy is void because there is not 'insurable interest', premium paid cannot
be recovered because in that case it amounts to 'wager,' except in the case of marine insurance
where the assured is not required to have insurable interest at the time of entering into the
contract.
Also, the premium cannot be recovered where the policy is avoided by the insurer on grounds of
fraud by the insured.

6. Mitigation of loss:
When the event insured against occurs, for example, in the case of a fire insurance policy when
the fire occurs, it is the duty of the policy-holder to take steps to mitigate or minimise the loss
as if he were uninsured and must do his best for safeguarding the remaining property, otherwise
the insurer can avoid the payment of loss attributable to his negligence. Of course, the insured is
entitled to claim compensation for the loss suffered by him in taking such steps from the insurer.

7. Doctrine or subrogation:
The doctrine of subrogation is a corollary to the principle of indemnity.
According to the principle of indemnity, the insured can recover only the actual amount of loss
caused by the peril insured against and cannot be allowed to benefit more than the loss suffered
by him .
The doctrine is the rule under which on payment of what is due under the policy is entitled to
every legal and equitable rights or remedy which the insured might have enforced against any
third party thus after indemnifying the insured for his loss, the insurer stands in his place and is
subrogated to his rights
If the insured receives any compensation from a third party in respect of the same risk, he must
pay the insurer.
This doctrine is applicable to fire, accidents and marine insurance.

NOTE:
1. This doctrine will not apply until the assured has recovered a full indemnity in respect of
his loss from the insurer. If the amount of the insurance claim is less than actual loss suffered,
the assured can keep the compensation amount received from any third party with himself to the
extent of deficiency, and if after full indemnification their remains some surplus he will hold it in
trust for the insurer, to the extent the insurer has paid under the policy.

2. The insured should provide all such facilities to the insurer which may be required by the
insurer for enforcing his rights against third parties. Any action taken by the insurer is generally
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in the name of the insured, but the cost is to be borne by the insurer.

3. The insurer gets only such rights which are available to the insured. He gets no superior
rights than the assured.

Castellan vs. Preston

P owned premises in Liverpool which he contracted to sell. The premises were insured against fire
by the plaintiff. In the contract of sale, there was no mention of insurance. A fortnight later,
before the completion of the contract the premises was damaged by fire and P received 330
pounds under the policy. Subsequently the purchase was completed and the purchase money was
paid without any reduction of the sum received by P from the insurance. It was held that the
insurance co. was entitled to succeed and the sum of 330 pounds to be repaid to them.

8. Doctrine of contribution:
Applies only to contracts of indemnity, i.e., to fire and marine insurances. The doctrine of
contribution states that 'in case of double insurance, all insurers must share the burden of
payment in proportion to the amount assured by each. If an insurer pays more than his rateable
proportion of the loss, he has a right to recover the excess from his co-insurers, who have paid
less than their rateable proportion.
Essential conditions required for the application of the doctrine of contribution :

1.There must be double insurance, i.e., there must be more than one policy from different insurers
covering the same interest, the same subject-matter and the same peril which has caused the
loss.

2. There must be either over-insurance or only partial loss.

3. The assured must recover the whole of his loss from one or more of the insurers, and not
from all the concerned insurers in proportion to the amount assured by each.
.

Illustration: A building is insured against fire for Ksh. 400,000 with insurer 'X' and for Ksh.
200,000 with insurer 'Y'. There occurs a fire, the damage is estimated at Ksh. 300,000. 'X' and
'Y' should share the loss in proportion to the amount assured i.e. in the proportion of 2:1. 'X'
should pay Kshs. 200,000 and 'Y' Ksh. 100,000. The policy holder can sue both the insurers
together or insurer 'X' only. Suppose that he sues 'X' only and recovers from him the full amount
of loss i.e. Ksh. 300,000. 'X' is entitled to claim contribution from 'Y' to the extent of Ksh.
100,000.

REINSURANCE
An insurer assuming larger risk from the direct insurance business may arrange with another
insurer to offload the excess of the undertaken risk over his retention capacity.
Such arrangement between two insurers is termed 'reinsurance'.
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Thus, by the device of reinsurance the original insurer transfers a part of the risk to the
reinsurer. Payment made by this insurer (called original insurer or reinsured) to accepting insurer
(called reinsurer) for the assumption of the risk by the latter is termed 'reinsurance premium'.

A reinsurance contract does not affect the original insurer's contractual obligation to the insured
under the original contract of insurance cc: Moreover, in the absence of any privity of contract
between the reinsurer and the originally insured person, the latter cannot have any remedy
against the former.
It is worth noting that since a contract of reinsurance is also a contract of indemnity, the
reinsurer, before paying the money, must make sure that the sum originally insured has been paid
by the 'original insurer' (or the 're-insured'). After paying the money in proportion to the risk
transferred to him, a reinsurer becomes entitled to the benefits of subrogation.

If for any reason, the original policy lapses, the reinsurance comes to an end. Further, if the
original contract is altered without the consent of the reinsurers, the reinsurers are discharged.
Hence a policy of reinsurance is co-extensive with the original policy.

DOUBLE INSURANCE
When the same risk and same subject-matter is insured with more than one insurer, there is said
to be 'double insurance'.
If two different policies are taken from one and the same insurer, it is not a case of double
insurance. It will be termed as 'full insurance. Under double insurance, the same risk and the same
subject-matter must be insured with two or more different insurers. In the event of loss under
double insurance, the assured may claim payment from the insurers in such order as the thinks fit,
but he cannot recover more than the hill amount of the actual loss, subject to the insured sum, as
a contract of insurance is a contract of indemnity.

When the amount, for which the property has been insured, is more than the real value of the
property, it is called as over insurance. Accordingly, in the case of double insurance, there is
over-insurance if the amount of different policies exceeds the actual value of the property
insured. Over-insurance is not of any advantage in case of fire and marine insurances as they are
basically contracts of indemnity and the assured can never recover more than the actual loss
suffered by him.
The problem of over-insurance does not arise in the case of life insurance because human life is
priceless.

AVERAGE CLAUSE IN INSURANCE

To understand the average clauses in insurance it is important to first appreciate that the word
"aver age" is used in a technical sense and that it is treated differently by the different classes
of insurance.
In marine insurance, for example, the word "average" refers to partial loss and a distinction is
drawn between "particular average" and "general average". The particular average refers to
partial loss affecting a particular interest, e.g. the cargo, the ship itself etc. while the general
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average refers to loss that must be shared by all interests involved in the marine venture, as
opposed to loss which must be borne solely by the owner of the lost or damaged goods. In fire and
accident insurance the average clause is used as a weapon against under - insurance: the insured
who makes a claim on a policy in which there was under-insurance is paid less, when he makes a
claim, than would have been the case had he taken out a policy fully covering his insurable interest.
For instance, under the pro rata condition of average if the insured takes out a fife policy
covering only 60 % of the value of his property, he will also be paid 60% of the loss suffered as a
result of fire damage; 40% of the loss must be borne by him personally.
The average clause in insurance does not apply unless it is specifically provided for in the
contract.

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