OVERVIEW OF INSURANCE LAW (English Law)

To insure something you need an Insurable Interest in it which you stand to lose if it isn’t insured. That interest has to be current not a mere expectancy of an interest in something. In other words, you have to own it and your interest must be legitimately yours i.e. in your correct name. A company which changes its name may find policies will not be valid until updated with the new name.

An insurable interest can exist in Statute or in Common Law. Also, if you have a part-interest, you can take on the insurance for the whole of that property. In some areas there are special requirements relating to a specific sector, as in the Hotel Proprietors Act 1956.

The history of the law of insurance focused on reducing the moral hazard so it can’t be used for ‘betting’. This was addressed by the Life Assurance Act 1774 and the Marine Insurance Act 1906.

Another rule is that the Cover must be in place both at the point of inception and the point of claim.

Importantly, there is now a duty not to misrepresent the item being insured – i.e. ‘In the utmost good faith’ (Uberrimae fidei in Latin) does not apply in this area thanks to the Consumer Insurance Act 2012 and the Commercial equivalent in 2015. The insured must make a ‘Fair Presentation of the Risk’.

However not all material facts have to be disclosed proactively. These include matters of law, facts the insurer knows already (including those waived by them already), facts a survey should reveal, facts about the trade, facts lessening the risk, and spent convictions (See online for Rehabilitation of Offenders Act).

Another important concept is Proximate Cause. This is not always the first cause, it is the active cause that set in motion the chain of events although it can be the main cause of loss. The key concept is the ‘Chain of Events’ (the leading case is Leyland Shipping v Norwich union 1918. Here, there was no break in the chain of events from the ship being earlier torpedoed, to the loss when it eventually sank was denied – it was a war loss).

Another leading case was Marsden v City and County Assurance Co (1865), where it was held that it is not sufficient to show that a harm would have occurred ‘but for’ the insured peril. One where a rider fell from a horse and much later died of pneumonia was denied based on the fall not being a proximate cause, although it would have reduced his health from being in the wet (Etherington v Lancashire & Yorkshire (1918). The Court accepted that it wasn’t part of a logical chain of events.

Another important principle is that of indemnity – putting you back in the position you were in before, which is the default position of the law of insurance. You can be given more or less cover than indemnity – depending on the wording. It’s common to be offered less, of course, as people don’t always state the true value of what they want covered, or assume is covered, as it can keep the premium down. 

‘Franchise’ means ‘all or nothing’ such that if the loss is greater than franchise, then you get indemnity; otherwise you get nothing. This is rare but is seen in, for example, sickness cover.

Another common term is ‘average’ i.e. loss is subject to averaging when the policy does not cover the sum supposedly insured. Say a building that was destroyed is valued at £5 million for insurance and the loss is £2m, yet the valuation of the building is £10m, then the payout will only be 2/10ths i.e. £1m.

The default position is that buildings are reinstated, and that contents are ‘new for old’ – i.e. no wear & tear deducted. In the commercial world, stock is at Cost Price.

With so-called Agreed Value Policies, the policy holder can get an expert opinion and if it turns out it was worth more than it was insured for, get this higher value (and lower if it is valued lower!)

Subrogation is a term which refers to the insurer recovering their losses from third parties – and is an action that is always brought in the name of the policy holder, as it is their right.

Finally, Contribution is where more than one policy covers the same loss. In this case the responsibility for the payout is shared proportionately between the insurers. This is using the maximum liability method (based on the sum insured) or independent liability method where each works our what they would paid out had they been the only insurer. Then it is pro rate based on those figures. E.g. 3000 and 1500 would mean 2/3 and 1/3.

If two policies both say there will be no cover if the loss is covered by another insurer, the law says both clauses are null and void