LAW OF INSURANCE

Charuni Gamage
LLM (UK), PGD in International Banking & Finance Law (UK), BA(Hons) Economics (UOC)
Attorney-at-Law & Notary Public
Commissioner for Oaths
Registered Company Secretary
•Insurance is the purchase of protection. You often take an umbrella to
protect yourself against the heavy rain or sun. Insurance is something like
that. The Insured or assured, protects himself against a serious risk (for
example, burglary or fire) by making a payment called a premium, and
securing the right to be indemnified by an insurer.
•Insurance is thus an important feature of both commercial and domestic
life. The institutions that provide insurance also represent a significant
component of the Sri Lankan financial services sector. No business
enterprise or individual engaged in business should ever forget the
importance and need for insurance.
•We can identify the following main benefits of insurance
 Insurance introduces security into business undertakings

• Whether it be life, fire, motor vehicle, accident or marine insurance, it guarantees protection against large and
uncertain losses that can occur in any business undertaking, in exchange for reasonable payments called premiums.
For example, a fire can destroy the property or goods of a business but no one can with certainty forecast that such
a fire will occur. Insurance provides for this uncertainty.
 Insurance increases business efficiency and enterprise

If it were not for the availability of insurance each businessman would have to establish his own financial provision
and staff to safeguard his business (land, goods and motor vehicles etc.) against many possible and unforeseen
accidents.
Insurance makes it possible to apportion and distribute costs of damage more equally. Everyone who insures his life
or property or motor vehicles etc does not suffer so as to be compensated.
Thus, that money that is saved is pooled together and invested and the collections from all the premiums plus the
interest earned from the investment is then used to pay the claims of those who have suffered some loss or damage.
Thus, insurance enables an equitable distribution of costs.
  Insurance serves as a basis for credit

Credit is most important to any business and insurance is a form of credit. For example, if a businessman wishes to
borrow money from a bank on the security of his factory or house, the bank will insist that the factory of house be
insured against fire and other damage. So also if a person imports or exports goods, marine or air-freight insurance
will be required during the shipment of the goods. In both these illustrations, insurance acts as an integral part of the
provision of credit to a business. Also, a life insurance policy is considered a good security by financial institutions
like banks that lend money to individuals.
 Insurance is also a method of compulsory savings

This is especially so in the case of life insurance. The money you pay as an annual premium on your life policy, you
will get back with interest and possible bonuses at the end of the period for which you insure your life, say at the end
of 70 years. And, if you die before reaching that age, the beneficiary you have named will receive the amount for
which you have insured your life.
 Prevalence of risk and desire for security

Insurance is about taking precautions against risk. A risk may be defined as the possibility of an unfortunate
occurrence. While one can ignore and disregard risks with insignificant consequences, there are serious risks we must
guard against. For example, the right of losing your pen or umbrella is accepted by many people but few will accept
the loss of one’s house by a fire or serious injury to oneself in a motor accident. Thus, the desire for security in the
case of an accident or misfortune in the basis of all insurance.
•Classification of Insurance
•The main categories of insurance are;
i. General insurance
ii. Life insurance
iii. Marine insurance
•General insurance includes all the different kinds of insurance that is available
other than life and marine insurance. Hence general insurance will cover areas
such as:-
a. Motor vehicle and house and contents insurance
b. Accident and sickness insurance
c. Fire and burglary (theft) insurance
d. Employees fidelity and cash in transit insurance
e. Travel insurance
f. Professional indemnity insurance.
•Law relating to Insurance
•As regards the common law governing insurance
in Sri Lanka, life, fire and marine insurance is
governed by English law: see section 2 and 3 of the
Civil law Ordinance No. 5 of 1852. All other types
of insurance described above is governed by the
principles of Roman Dutch law.
•Requirement of Insurable Interest
•Before a person can obtain an insurance policy he must show that he has some
“insurable interst” in the subject matter of the insurance. This requirement is an
“insurable interest” is a requirement of the common law and not of statute law. An
“insurable interest” means that the person seeking the insurance (the insured) will
benefit from the preservation of the subject matter insured or be affected by its loss. The
reason why the law insists on an “insurable interest: is to distinguish an insurance
contract from a gambling or wagering contract and also to ensure that the insured will
not willfully damage or destroy the subject matter of the insurance.
•This requirement of an insurable interest has an important bearing on life insurance. In
the case of life insurance, an insurable interest means that the person taking the
insurance will sustain pecuniary loss on the death of the person whose life is insured.
The insurable interest need only subsist when the insurance policy is taken. The policy
is not affected if the insurable interest ceases to exist after the policy is taken and before
the death of the insured.
• The following are case law illustrating insurable interest in life insurance

i. A person always has an insurable interest in his own life and one spouse has an insurable interest in the life of
the other spouse. Griffiths v Fleming [1909] 1 KB 805
ii. A parent normally, has no insurable interest in his child’s life unless the parent is supporting the child.
Howard v Refuge Friendly Society (1886) 54 LT 644
iii. Similarly, a child has no insurable interest in the parents’ lives unless the child is being supported by the
parents.
iv. Sisters have no insurable interest in each other’s lives. Evanson v Crooks (1911) LT 264
v. A creditore has an insurable interest in the life of the debtor to the extent of the amount of the debt. Dalby v
Indian and London Life Assurance Co (1854) 15 CB 365
vi. A surety (guarantor) of a debt, has an insurable interest in the life of the principal debtor and so have joint
debtors in each others lives to the extent of half the debt. Banford v Saunders (1877) 25 WR 650
vii. An employee engaged for a term of ears has an insurable interest in the life of his employer for that period for
which he is employed because if the employer dires the employee may lose his employment and therefore his
wages. A manager of a theatre where artists and actors perform has an insurable interest in the life of anactor
engaged by him to perform at his theatre Habden v West (1863) 3 B&S 597
• The requirement of an “insurable interest” in general insurance, other than life insurance, is illustrated in the
well-known English case of Macaura v Nothern Assurance Co Ltd (1925) AC 619.

• In that case, Macaura had sold his business to a company in which he was the major
shareholder. The property which was also transferred to the company had been insured in
Macaura’s name. After the transfer to the company, the property was destroyed by a fire and
when Macaura claimed under his insurance policy, the insurer refused to pay arguing that after
the transfer Macaura had no insurable interest in the property because it now belonged to the
company. This argument was based on well-known principles of company law that a company is
a separate and distinct legal entity from its shareholders – however large the shareholding. The
English House of Lords upheld this argument and held that when the fire occurred it was not
Macuara but the company that had an insurable interest in the property and since the insurance
policy was not in the company’s name, the insurer was not liable to pay for the loss.
•The duty of utmost good faith in insurance
•Contracts of insurance are considered as special types of contracts which impose a duty of utmost
good faith on the person applying for the insurance cover. The requirement of utmost good faith is
normally referred to by the Latin uberrimae fidei. Utmost good faith is higher than good faith for
which the Latin term is bona fidei.
•Utmost good faith means that the person seeking the insurance owes a duty to disclose to the insurer
every material fact which he knows or ought to know about the insurance so that the insurer can
properly evaluate the risk he is undertaking. If a material fact is not disclosed by the person seeking
insurance, the insurer has a right at any time to reject payment on the policy.
•The cost of the insurance policy or the premium that has to be paid will normally depend on the risk
undertaken. The insurer can only evaluate the risk and decide on the premium etc. on the basis of what
is disclosed to him in the application. Normally, only the person seeking the insurance and not the
insurance company will know the true facts about the subject of the insurance. For example, if a
person who is asking for a life policy is suffering from a serious illness he must disclose that fact in
his application form. If he does not do so any life policy that is issued to him can be later invalidated.
•Only material facts need be disclosed
•A fact is material if it would influence the judgment of a prudent insurer
in deciding whether to accept the risk and if so, in fixing the amount of
the premium. As an illustration London Assurance v Mansel (1879) 11
ChD 363, where Mansel applied for a life insurance policy, he was
asked if he had applied to other insurance companies for such a policy.
He said that he had insurance policies with two other companies but he
did not reveal the fact that his application for life insurance had been
rejected by several other companies. The court held that mansel had
failed in his duty of utmost good faith to disclose a material fact and
therefore his policy could be set aside.
•In Looker v Law Union Insurance Company [1928] 1 KB 554, Looker, who applied
for a life policy was badly ill from an attack of pneumonia, but he did not disclose
this fact to the insurance company. After the policy was issued to him he died
because of the illness. The court held that the insurance company could refuse to
honour the policy because of non-disclosure of a material fact.
•On the other hand, in Mutual Life Insurnace Co. v Ontario Metal Product Company
[1925] AC 344, an applicant for life insurance was asked whether he had consulted a
doctor during the past five years. He answered “none” when in fact he had consulted
a doctor for influenza and had received some tonic but he had not kept away from
work because of that illness. The doctor for the insurance company conceded that
even if he had known these facts he would have still recommended the life policy.
On these facts, the court held that the non-disclosure by the applicant was not a
material non-disclosure and did not affect the validity of the policy.
•Why it is important to declare material facts to insurer
•It is only by the disclosure of material facts that the insurance company can evaluate the risk they are
undertaking and fix an appropriate premium to be paid for the insurance policy. For example, in the
case of a motor vehicle insurance, if the person seeking the insurance has been earlier convicted on
several occasions for dangerous driving or driving under the influence of liquor, then obviously such
a person is prone to motor accidents. In such a case, the insurance company must be told of these
prior convictions. Then they may decide to refuse the insurance or to demand the payment of a higher
premium or limit the risks to a specified amount, for example, not exceeding Rs. 1 million for any
injury or damage to the car, the driver and/or passengers.
•In the Australian case of Khoury v General Insurance Office (1984) 165 CLR 622, Khoury applied
for an insurance to protect his goods and valuables in his household. At that time, Khoury had a
suspicion that his own children and robbed him of money kept in his house, but he did not disclose
this fact to the insurance company when he applied for the household insurance. Subsequently, goods
were stolen from his house and he claimed the loss on the insurance policy. The Court held that the
insurance company was not liable because Khoury has not disclosed a material fact to them.
• Concept of ‘indemnity’ and ‘subrogation’ in insurance
•Most insurance contracts (other than life insurance) are indemnity contracts. The words
•“indemnity” or “to indemnify” means to make good or compensate for loss or damage suffered
or to give security against any anticipated loss or damage. The basis of the indemnity is that the
insured is contractually entitled to have a loss compensated. In insurance contracts, the insurer
indemnifies the insured to pay the amount of the insured’s actual loss upto the amount covered
•by the insurance policy. Also, if the insurer pays on the insurance policy, he is subrogated to
any right of action which the insured may have against anyone who may be legally liable for
the loss that was compensated. Under this doctrine of subrogation when the insurer honours the
claim of the insured under the insurance policy, the insurer is placed in the position of the
insured.
•For example, if goods insured by Mr. Silva with an insurance company are damaged by a fire
negligently caused by Perera, and the insurance company pays Silva under the policy, then the
insurance company can sue Perera for the damage caused to Silva which the insurance
company settled with Silva. Under the principle of subrogation Silva’s rights to sue Perera pass
to the insurance company.
•Special Feature of Life insurance
•Uncertainty is a common feature in all insurance but uncertainty in life insurance is
different from that in other types of insurance. This is because death unlike any other
event is certain; no one can ultimately avoid it. The only uncertainty about death is as
to when it will occur. In the case of non-life insurance, property insured against loss
by fire may never catch fire and a motor vehicle insured against accidents may never
be involved in an accident.
•Accordingly, some classify life insurance as a type of contingency insurance, that is, a
contract to pay a sum of money when the event insures against (namely, death)
occurs. And, because death is ultimately assured, it is argued that life insurance should
be called death assurance.
•Duration of insurance cover
•The duration of the insurance cover depends on the period of time for which the
policy has been taken. In a general insurance policy (for example, motor, fire and
household contents insurance) the duration is usually for one year. Accordingly, it
is always wise for the insured to give standing instructions to the insurance
company to renew the policy at the end of each year and to send the invoice to the
insured for the payment of the annual premium. If this is not done the insured may
forget to renew the policy and the subject matter of the insurance will not be
protected.
•In a life insurance policy the duration can be for a specified term, for example 10
years or for the insured person’s lifetime, or as in the case of an endowment policy,
upto a certain age.
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