FACULTY OF LAW

UNIVERSITY OF IBADAN

LCI 402 – Nigerian Law of Insurance II

(c) K. Anifalaje, 2023

THE PRINCIPLES OF INDEMNITY AND REINSTATEMENT;

SUBROGATION AND CONTRIBUTION IN INSURANCE LAW

INDEMNITY

Two of the rights of the insured under an insurance contract are indemnity and
reinstatement. Insurance contracts other than life insurance are contracts of indemnity
whereby the insurers undertake to make good the insured’s loss. Logically, if there is
no loss, the question of indemnity does not arise. The rule of indemnity therefore is to
restore the insured who has suffered a loss within the contemplation of the parties, to
the financial position which he occupied before the loss in relation to the subject
matter.

Secondly, the principle ensures that the insured does not profit from a loss. While a
partial loss occurred, the insured must be indemnified accordingly and not for the full
value insured.

Brett, L.J. in Castellain v Preston (1883) 11 Q.B. 380 had asserted that:

The very foundation, in my opinion of every rule which has been applied
to insurance law is this, namely, that the contract of insurance contained
in a marine or fire policy (and that equally applied to accident policies) is
a contract of indemnity and of indemnity only and that the contract
means that the assured, in a case of loss against which the policy has
been made, shall be fully indemnified, but shall never be more than fully
indemnified. This is the fundamental principle of insurance and if ever a
proposition is brought forward which is at variance with it, that is, to say,
which either will prevent the assured from obtaining a full indemnity or
which will give the assured more than a full indemnity, that proposition
must certainly be wrong.
It would offend the principle of indemnity therefore if the insured were permitted to
recover more than an indemnity for his loss. In Royal Exchange Assurance (Nig) Plc
v Anumnu (2003) 6 NWLR (Pt. 815) 52, it was held that in insurance transaction,
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in the case of total loss, the assured receives the whole sum assured. He is, in the event
of the loss being partial, entitled to recover only a fractional part of it, the fraction
being the sum as enumerator, and the value of the subject matter as denominator.

In a motor insurance policy for example, it is the current value of the car in the market
immediately before the accident occurs. Thus, in Ezewe v Asiemo (Supra), Ataka J.
said:

“This contract of insurance . . . is meant to indemnify the assured and

not to enrich him over and above that which is necessary to enable him
restore his car. It follows that what the 2nd defendant is liable to pay to
indemnify the plaintiff will materially depend on the market value of
the car at the time and place of the accident.”

Note, however, the insured has a duty to recoup the loss by himself before calling on
the insurers for an indemnity, for the relief under an indemnity contract such as a
contract of insurance is secondary and the primary responsibility to repair the loss lies
on the insured himself. Thus, in Ode v Mercury Insurance Coy Ltd (1974) 4 ECSLR
612 at p. 614, in which the plaintiff’s claim was for the recovery of the cost of repairs
to his damaged car which was insured with the defendants and he sought to bring in
the defendants into the arrangements made with Leventis Motors Ltd to repair the car.
Johnson J., observed that:

“The plaintiff was labouring under some misapprehension as to his

rights under the contract of insurance between him and the defendant
company . . . The plaintiff, laboured under the misapprehension that
the defendant company must deal directly with the Leventis Motors
Limited . . . under the provisions of the (the policy of insurance) . The
liability of the defendant company is no more than that of indemnifying
him for the damage done to his car as a result of the accident . . . The
duty therefore would first have laid on the plaintiff to pay for the cost
of repairs directly resulting from the accident before claiming from the
defendant company.”

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REINSTATEMENT

Reinstatement of the subject matter of insurance is the parallel relief to indemnity in

the sense that the primary duty to restore or repair the subject matter of insurance after
its damage lies on the insurers Thus, the process whereby the insurers undertake to
replace or repair the property insured instead of paying a money indemnity to the
insured is known as “reinstatement.”

In Nicholas Bros Ltd v Lion of Africa Ins. Coy. Ltd (1961) LLR 86 at p. 92, after a
systematic review of a number of authorities, Udo Udoma, J., concluded that
reinstatement of the subject matter of an insurance contract means restoration to its
original position or status quo ante. According to the learned Judge,:

“It is clear on the authorities cited above that when the defendants
exercised their option to “reinstate and repair” the car in question,
they undertook to make good the damage done to the car so as to
leave the car so far as possible as though it had not been damaged.”

The right to reinstate can be derived from the contract of insurance by insertion of a
reinstatement clause in the policy or from statute. It has, however, been held in
Reyner v Preston (1881) 18 Ch 1 that the contract remains a contract to pay money
despite the reinstatement clause. Reinstatement clause, therefore, confers on the
insurer an option to pay money or restore to the assured the property damaged or
destroyed. The election constitutes an abandonment of the original right to payment of
money.

Thus, in Anderson v Comercial Union Assurance Co (1885) 55 LJQB 140, Lord

Esher, MR. stated that if the property is wholly destroyed, the company may, if they
choose, instead of paying the money, to “replace” the thing by others which are
equivalent, or if the goods insured are damaged but not destroyed, may exercise the
option to “reinstate” them, that is, to repair them and put them in the condition in
which they were before the fire.

Note that in pursuing a reinstatement clause, the insurer cannot limit expenses to the
amount insured. Where the subject matter insured is identified goods, there is always a
ready available market where the equivalent can be bought. In the case of a building,

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it will be impossible to restore every practicable thing in the destroyed property. A
substantial part must be done to satisfy the requirement. The insurer may be liable for
damages where the reinstated building falls far short of the original building.

See section 66 of the Insurance Act on reinstatement of houses or buildings insured

against by fire.

SUBROGATION

The principle of subrogation lends support to the doctrine of indemnity in ensuring

that the insured does not make profit from an insurance contract. The principle gives
the insurer the right to stand in the place of the insured, where the latter has a right of
indemnity from a third party for loss already covered by the insurance policy. Thus, at
common law, and by the very nature of insurance contracts, insurers generally possess
a right of subrogation against any third party who has been responsible for the damage
occasioning the loss for which they should have paid. The doctrine arises in all
policies which are contracts of indemnity and the right exists where there has been a
total loss and not where there is a partial loss. Under the doctrine, the insurer is
substituted for the assured after fulfilling some contractual obligations. The right
exists to prevent imbalance in financial acquisition by one party to the detriment of the
other.

Therefore, subrogation is the right of insurers who have paid for a loss to receive the
benefits of all the rights and remedies of the insured against third parties, whether
such rights exist in contract, tort or under statute or any other rights whether by way of
legal or equitable interest which, if satisfied, will extinguish or diminish the ultimate
loss sustained.

In Castellain v Preston (1881) 11 Q.B.D. 380, Brett, L.J. stated:

The doctrine of subrogation is to be applied merely for the purpose of

preventing the assured from obtaining more than a full indemnity; the
question is whether the doctrine applied to insurance law can in any way be
limited. In order to apply the doctrine of subrogation, it seems to me that the
full and absolute meaning of the word must be used, that is to say, the insurer
must be placed in the position of the assured.

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The conditions necessary for the exercise of the right of subrogation by the insurer are
stated by the Supreme Court in British India General Insurance Coy Ltd v Alhaji
Kalla (1965) 1 ALL NLR 240, where it held that the right of subrogation does not
arise until the insurers have admitted their liability to the assured and have paid him
the amount of the loss.

In H. Cousins & Co. Ltd v D & C Carriers Ltd (1971) 2 Q.B. 230, it was held that
under the doctrine of subrogation, insurers who had indemnified an assured were
entitled to sue the wrongdoer in the name of the assured, not only to recover the loss
but also interest on the whole or any part thereof, and the fact that the insurers had
paid off the assured was res inter alios actus as far as the defendants were concerned.

In Scottish Union National Insurance Co v Davies (1910) 1 Lloyd’s Rep. 1,

the insurers were held not entitled to a sum recovered by the insured from third parties
in respect of damages to his car because the insurers had not indemnified the insured
and consequently, the right of subrogation did not arise.

The insurers who have paid for a loss may thus exercise the right of the insured to
recover from third parties or if the insured has already exercised those rights, the
insurers will be entitled to repayment from him. The rule of law is that the insurance
must not be used to turn what is essentially a loss or misfortune into a device for
making profit. Thus, in Weide & Co Ltd v Hashim Hashim (1968) NCLR 330,
Sowemimo J, permitted the plaintiffs to bring an action against the defendants to
recover damages for the defendant’s negligence for the benefit of the plaintiffs’
insurers. In the instant case, the defendant carried on a transport business and he
contracted to carry the plaintiff’s goods under the terms of the contract. The plaintiffs
claimed under the terms of the contract. The plaintiff took out an insurance policy in
his name to cover the goods in transit. While the goods were in transit, the lorry
carrying them overturned and the goods were damaged and lost. The plaintiffs
claimed under their insurance policy and received the cost of the goods. They then
instituted the proceedings for the benefit of the insurance company for the defendant’s
negligence. It was held that the insurer, having paid the owner under the terms of the
insurance, is subrogated to the owner’s remedy against any carrier or other bailee

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responsible for the safety of the goods. He is entitled to recover the whole loss from
such person.

But, it has been held in Lion of Africa Insurance Coy Ltd v Scanship (Nig.) Ltd
(1969) NCLR 317, that unless there is a formal assignment of the insured’s right of
action against a tortfeasor, an action for subrogation must be instituted in the name of
the insured but not in that of the insurers. In the instant case, the appellants issued a
policy of insurance in respect of certain goods shipped in a vessel belonging to the
respondent’s principal. The goods were damaged and the appellants made a payment
to the consignees, as they were liable to do under the policy and instituted the present
proceedings to recover the amount from the respondents as agents of the ship owners.
The magistrate dismissed the action. On appeal, the appellants contended that they
were entitled, by subrogation to bring the action in their own name. The respondents
maintained that the action could not be brought in the appellant’s name.

In all, the objective of subrogation is to prevent the insured from recovering more than
full indemnity so that where the insured is entitled to recover what could amount to
excess over what the loss is, the insurer is placed in his position to recover the excess.
Thus, subrogation is a corollary to the principle of indemnity and another proposition
adopted to carry out the fundamental principle of indemnity in order to prevent the
assured from recovering more than a full indemnity.

CONTRIBUTION

In the law of insurance, perhaps the most fundamental principle from the standpoint of
the social purpose of insurance is that of contribution. This is because without the
principle of contribution, the insurance scheme in modern societies would largely be
liable to abuse and adulteration by the unscrupulous who might seek to amass wealth
out of it and surely such an abuse would defeat the very objective of insurance and
seriously endanger its survival. The principle of contribution applies only to property
insurance otherwise classified as insurance for indemnity. The social purpose of
property insurance has always been to restore the insured to his status quo ante in

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respect of the property or the subject matter of insurance which has been damaged or
lost.

There are two distinct types of contribution in insurance law. The first would require
the insured under an appropriate policy term to bear a particular proportion of the total
loss when making a claim. This is generally a valid term which the Nigerian courts
have enforced in favour of insurers. See e.g. Audu Bida v Motor and General
Insurance Co. Of Nig. Ltd (1972) N.C.L.R. 270.

The second type of contribution is an arrangement recognisable by law, whereby an

insurer who has insured the same property which another insurer has separately
insured would be compelled to contribute his pro-rata share of the claim where the
latter insurer has paid the claim to the insured. Obviously, this form of contribution is
a continuation of the claim settlement process and the essential parties thereto, are
insurers.

The principle of contribution is an equitable one. Thus, in Stir-Living v Forester 3

Bligh, 590 at p. 591 Lord Redesdale declared:

“The principle is established in Dering v Winchelscas (White &

Tudor, 535) is universal, that the right and duty of contribution is
founded in doctrines of equity; it does not depend upon contract. If
several persons are indebted and one makes the payment, the creditor
is bound, in conscience if not by contract, to give the party paying
the debt all his remedies against the other debtor . . . “

Also, in Godin v London Assurance Co. (1758) 1 Burr 489 at p. 492, Lord
Mansfield, C.J. in a characteristic tone asserted:

“If the insured is to receive but one satisfaction, natural justice says
that the several insurers shall all of them contribute pro rata to
satisfy that loss against which they have all insured.”

Consequently, there has always been a right of contribution at common law which is
enforceable with or without any relevant policy condition.

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The principle of contribution is partly one of joint liability in equal or unequal shares
depending on which ratio of contribution the courts would adopt in view of the
relevant clauses in the policies of the respective insurers.

As a general rule, where two or more insurance policies cover the same rights and
interests in any risk, the principle of contribution will be applied between the different
insurers and each of the insurers is under a duty to settle with the insured the full
amount for which he is liable if his policy stood alone. But where an insurer has paid
up the insured’s claim in full he is entitled to an equitable contribution from the other
insurer(s) on the same principle as co-sureties are bound to contribute inter se when
anyone of them is called upon by the creditor to pay.

See section 81 of the Marine Insurance Act 1961.

Obviously, the right of contribution is a function of the process of claims settlement in

insurance law.

It is, like subrogation a secondary legal right in the insurer who has paid and a
correlative duty for pro rata payment on the insurer who is yet to pay. The conditions
giving rise to a right of contribution are as follows:

The relevant policies must relate to :

(i) The same subject matter or the same property – North British and
Mercantile Ins. Co. v London, Liverpool & Globe Ins. Co. (1877) 5 Ch. D.
569;
(ii) The same peril or risk; a substantial part of the same risk must be covered
by the both insurances. - North British and Mercantile Ins. Co. v London,
Liverpool & Globe Ins. Co. (1877) 5 Ch. D 569;
(iii) The same assured; - Godin v London Assurance Co. (1758) 1 Burr. 489
per Lord Mansfield, C.J. at p. 492; and
(iv) Such policies must be valid and in force at the time of loss; As such, the
right of contribution will not apply where one of the policies has lapsed or
unenforceable where there is a breach of a condition for instance - Wendell
v Road Transport & General Ins Co. Ltd (1932) 2 K.B. 563

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 (v) Must be legal contracts of Insurance; - Woods v Cooperative Ins. Society
(1924) S.C. 672;
(vi) Must not contain any stipulation by which it is excluded from contribution.
– Niger Co. Ltd v Guardian Assurance Co. (1922) 13 LL.L Rep. 75, HL

Thus, where two or more contracts of indemnity that are in force cover the same
interest in a common subject matter in respect of the same risk, the law does not
permit the insured to recover under both and so make a profit on his loss. Where
therefore, the insured is over-insured because of increasing the insurance, the
respective insurers must share the loss in rateable proportion. If one of the insurers has
paid more than his proportion, he is entitled to the appropriate contribution from the
other insurers.

However, there will be no right of contribution where separate insurances are effected
upon the same property by different persons interested in it for the purpose of
protecting their separate interests only. For instance, where separate policies are
effected by bailor and bailee as in North British and Mercantile Ins. Co. v London,
Liverpool & Globe Ins. Co. (Supra) or by landlord and tenants as in Andrew v
Patriotic Assurance Co (1986) 18 L.R. 3551, or by mortgagee and mortgagor,
liability under each policy will be assessed separately.

Thus, when (but not before) the insurers have discharged their liability they are
entitled as between themselves and other insurers, to call upon the latter to bear their
own share of the loss and pay their own proportion of the amount already paid under
the first policy. But, unlike in subrogation, where an insurer has a right of
contribution, he also has the right to institute proceedings to enforce that right in its
own name. Thus, in Austin v Zurich General Accident & Liability Ins Co. Ltd
(1945) 1 K.B. 250 at p. 258 the actions which were brought against the plaintiff were
settled by his own insurers. In an action by the plaintiff for the benefit of his own
insurers, it was held that since that was a claim for double insurance the plaintiff’s
insurers should have brought the action in their own names instead of the insured
bringing same on their behalf as if it were a right of subrogation.

The principle of contribution does not apply to non-indemnity insurance such as life
and personal accident insurances. Life insurance for instance, is not an indemnity
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insurance but it is a unique form of saving and investment by the insured and the sum
for which a life is insured is at the discretion of the assured since the value of a
person’s life cannot be accurately calculated.

Note that the right of contribution does not accrue to an insurer until he has
discharged his liability to the insured. See Williams v North China Ins. Co. (1876) 1
C.P.D. 757 at p. 768, C.A. per Jessel, M.R.

Moreover, whenever there is a right of contribution, an insured is entitled to select any

policy of insurance upon which to claim his indemnity unless there is a policy
condition to the contrary and it would not be a valid defence for the insurers
concerned to refer to other policies in existence which the insured might have equally
enforced. See section 33 (1) and (2) of the Marine Insurance Act 1961.

When the court holds that the contribution rule will apply in a case before it, such a
holding is the beginning of an enquiry – often tedious – as to which of the various
almost endless methods of loss apportionment ought to be applied in determining the
sum of money each insurer should contribute towards the common liability. As a rule,
where both policies were effected for the same amount of insurance, equal
apportionment will be decreed by the courts. Where however, the respective amounts
of insurance differ, either the “maximum liability” principle or the “independent
liability” principle may be applied among a host of other complex methods.

Under – Insurance

Generally, there is no rule against under-insurance. In any policy of insurance, the

insured can recover the whole amount of his loss to the actual limit of the sum
insured. Where the insured understates the value of the subject matter insured and thus
obtain a smaller premium, when there is a partial loss, the insured can recover the full
amount of the loss since the amount claimed is still within the amount under-insured.

In certain cases where the principle of contribution is held to apply the insured’s
expectation may remain an illusion. Where, for instance he has a property which is
worth N 80,000.00 and he took out two separate policies of insurance with two
insurers for N40,000.00 each in the hope of insuring himself fully, under the

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contribution rule, he will be deemed to have under-insured the property for N40,00.00
because the total sum insured is immaterial, it is the sum insured with each insurer
separately that matters. As such, if the property is completely destroyed, the insured
will only recover N40,000.00 at the rate of N20,000.00 each from each insurer.

See section 82 of the Marine Insurance Act 1961.

The situation described above will even worsen when the particular policies of
insurance were insured “subject to average.” Under this, the policy may contain
stipulation which provides that some proportion of the loss may be borne by the
assured. In the given example above, where the policy contains “subject to average”
clause, the insurers will be liable for just one-half of the sum insured, that is
N10,000.00.

Generally, in order to prevent claim controversy, the insurer may declare that the
policy is subject to average. In this wise, if at the time of the loss the sum insured does
not represent the value of the subject matter insured, the insured is his own insurer for
the requisite proportion.

Excess Clause

Excess clause is found mainly in motor insurance policies and public liability policies.
In this instance, the policy will specify certain sum of money which the insured will
bear in the event of an accident such as the first amount of loss which may be fixed at
N10,000 or N20,000. It varies from one insurer to the other. The effect of excess
clause is to relieve the insurers of liability for minor accident cases in motor
insurance.

In other cases, it gives the assured the right of indemnity only where the loss incurred
exceeds the specified limit.

The Rationale of the Contribution Rule

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The courts were not motivated by altruistic desires towards insurers as individuals
when they were fashioning the contribution rule. They were rather impelled by the
more sublime motive to advance society by preserving the institution of insurance. It
was discovered that unless the principle of contribution was developed through the
cognate principle of indemnity, the insured might be tempted to take no care of his
property or even to set it on fire in the hope of making fantastic claims from his
insurer. The contribution principle was consequently designed primarily to perpetuate
the social purpose of insurance by ensuring that an appropriate indemnity was paid
without more and without less than what was bargained for by the insured. Although,
an insurance may legitimately be for less than a complete indemnity it may not, as a
rule be for more otherwise it will transgress the social purpose of insurance. Thus,
based on logic and legal consideration, the insured in an insurance contract cannot
recover more than a full indemnity.

See Brett, L.J. in Castellain v Preston (supra) stated that:

“The very foundation in my opinion, . . . or which will give the

assured more than a full indemnity, that proposition must certainly
be wrong.”

Actually, the emphasis in insurance law is on the peremptory phrase “without more”
while its corollary, “without less” is essentially a function of social justice. In the
words of Lord Moncrieff in Scottish Amicable Heritage Securities Association v
Northern Assurance Co. (1883) 11 R. (Court of Sess.) 287,

“That principle (i.e. contribution) or rather that rule of practice depends

on the doctrine – one not of law but of common reason that a man who
insures his interest in property against loss by fire, whether that interest
is that of proprietor or that of a creditor, cannot recover from the insurer
a greater amount than he had lost by the contingency insured against.
So, in the case of double insurances of the same interest with different
insurance companies, the assured will not be entitled to recover more
than the full amount of the loss which he has suffered. “

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Thus, with reference to the insured, the contribution principle was designed to prevent
unjust enrichment, while with reference to the insurers it was designed as a means of
doing justice and equity as the rule is based on the supposition that the first insurers
have paid more than they ought fairly to have paid: the maxim – Equity looks on that
as done which ought to be done” is apposite here.

The contribution principle can then be treated as a general rule that if there is under-
insurance, the assured can never recover more than the sum for which the property is
insured, while if there is over-insurance he cannot recover more than the actual value.
See per Cairns, L.J. in Commercial Union Assurance Co Ltd v Hayden (1977) 1 Q.B.
804 at p. 814 C.A. but, in a valued policy of insurance over property, as an exception
to the general rule, the assured might obtain more than an indemnity. In Irving v
Manning (1848) 6 C.B. 391 at p. 422; 136 E.R. 1302 at p. 1314, Petteson, H.,
asserted that:

“A policy of assurance is not a perfect policy of indemnity. It must be

taken with this qualification; that the parties may agree before hand in
estimating the value of the subject assured, by way of liquidated
damages, as indeed they may in any other contract to indemnify.”

As it can be seen from the discussion thus far, both the principle of indemnity and of
contribution places no higher duty on an insurer than to place the insured in the same
position he occupied before the loss. It is socially undesirable that an insured should
stand to make a profit out of an event such as a fire or a shipwreck; if he could make a
profit, it has been persuasively contended that there might well be more fire or
shipwrecks. The legal control of that temptation to stage a loss was the aim of the
contribution principle in insurance law.

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