LLM Group 2 Business Law Law of Insurance 2016 Question Paper with Solutions

For full marks, cover: the three or four marks of an insurance contract taken from the case law, not from a textbook list; then the wagering comparison worked properly, which means section 30 of the Indian Contract Act, 1872, section 6 of the Marine Insurance Act, 1963 and the single feature that separates the two, insurable interest; then the indemnity question, which has a three way answer and not a yes or no, because some insurance is indemnity, some is not, and the valued policy sits between; the consequences that follow from classification; and the Indian authorities on each limb.

A fourth element was added by the later cases, the assumption and spreading of risk by a person in the business of doing so. In Department of Trade and Industry v. St. Christopher Motorists Association Ltd., [1974] 1 WLR 99, an association undertook to supply a chauffeur to a member disqualified from driving. Templeman J. held this was insurance although the benefit was in kind, because the association assumed a risk in return for a subscription and spread it over its membership. In Medical Defence Union Ltd. v. Department of Trade, [1980] Ch 82, the member had no enforceable right to any benefit, only a right to have his request for assistance considered in the Union's discretion; Megarry V.C. held that this was not insurance, for want of a right to money or money's worth on a defined event.

In India a wagering agreement is void. Section 30 of the Indian Contract Act, 1872 provides that agreements by way of wager are void and that no suit shall be brought for recovering anything alleged to be won on any wager. Section 6 of the Marine Insurance Act, 1963 puts the same rule in insurance terms: a contract of marine insurance is deemed to be a gaming or wagering contract where the assured has no insurable interest and the contract is entered into with no expectation of acquiring one, or where the policy is made "interest or no interest", or "without further proof of interest than the policy itself", or "without benefit of salvage to the insurer", and such a contract is void.

The line between the two is therefore insurable interest, and nothing else. A wagerer has no interest in the event before he bets: he creates his exposure by the very act of betting, and if the event does not happen he is in the position he would have been in anyway. An insured has an interest before he insures: the risk exists whether or not he buys the policy, and the contract only transfers a loss he would otherwise bear. The insured is trying to be restored, the wagerer is trying to gain.

The classic Indian illustration of the requirement is Macaura v. Northern Assurance Co. Ltd., [1925] AC 619, English in origin but received in India without qualification. Macaura sold the timber on his estate to a company in which he held every share and to which he was the principal creditor, and insured the timber in his own name. Two weeks later almost all of it was destroyed by fire. The House of Lords held he could not recover a penny: the timber belonged to the company, and neither a shareholder nor a creditor has any legal or equitable interest in the assets of the company. Had he recovered, the policy would have been a wager on the fortunes of a stranger's property.

Is it a contract of indemnity?

The answer is threefold and a candidate who gives a single answer loses the marks.

First, most insurance is a contract of indemnity, but not the indemnity of section 124 of the Indian Contract Act, 1872. Section 124 defines a contract of indemnity as one by which one party promises to save the other from loss caused by the conduct of the promisor himself or of any other person. An insurance contract indemnifies against loss caused by an event, which may be an act of God or an accident with no human author at all, so it falls outside the statutory definition. Indian courts treat insurance as an indemnity in the wider common law sense, and section 3 of the Marine Insurance Act, 1963 says so expressly: the insurer undertakes to indemnify the assured "in the manner and to the extent thereby agreed".

Second, life and personal accident insurance are not contracts of indemnity at all. Dalby v. India and London Life Assurance Co., (1854) 15 CB 365, settled it. The office had insured the life of the Duke of Cambridge for a creditor's benefit; the debt was satisfied before the Duke died, so at the date of death there was no loss to indemnify. The Court of Exchequer Chamber held the whole sum payable, overruling Godsall v. Boldero, (1807) 9 East 72, in which creditors of William Pitt had insured his life and, the debt having been paid by his executors, Lord Ellenborough had held the policy to be a contract of indemnity so that nothing was recoverable, and holding that a life policy is a contract to pay a fixed sum on a defined event in consideration of premiums, not a promise to make good a loss. It follows that there is no subrogation on a life policy, no contribution between life insurers, and no reduction because the beneficiary has suffered less than the sum assured.

A contract of insurance is a contract by which, for a premium, one party undertakes to confer a benefit on another on the happening of an uncertain event adverse to that other's interest, the risk being assumed and spread by a person in the business of doing so. Prudential Insurance v. IRC supplies the first three marks and St. Christopher Motorists the fourth, while Medical Defence Union shows that a discretionary benefit is not enough.

It is not a wagering contract, and the single reason is insurable interest. The wagerer manufactures his exposure; the insured already has it. Section 30 of the Indian Contract Act, 1872 and section 6 of the Marine Insurance Act, 1963 make a policy without interest void, and Macaura shows how strictly that is applied even where the commercial reality points the other way.

Whether it is a contract of indemnity depends on the class, and the correct answer is a division. Property, marine, motor own damage and liability insurance are contracts of indemnity in the Castellain v. Preston sense, though not within section 124 of the Contract Act, and carry subrogation, contribution and average with them. Life and personal accident insurance are not indemnities, on the authority of Dalby, and carry none of those doctrines. The valued policy under section 29 of the Marine Insurance Act, 1963 is an agreed measure of indemnity that the statute permits to be conclusive.