LLM Group 2 Business Law Law of Insurance 2018 Question Paper with Solutions

For full marks, cover: work this question backwards from the consequences, because that is what makes the classification worth twenty five marks: state first what actually turns on whether a policy is an indemnity and whether it is a wager, then the nature of the contract, then each classification in turn. The indemnity question has a three part answer and not a yes or no. The wagering question has a one word answer, insurable interest, which must then be worked out through the statutes and Macaura.

Why the classification matters

Nothing in insurance law is decided by the label alone, but a great deal is decided by these two labels, and listing the consequences first shows the examiner why the question is being asked.

The nature of the contract

Neither the Insurance Act, 1938 nor the Contract Act defines a contract of insurance, so the definition is judicial, and the working test is Channell J.'s in Prudential Insurance Co. v. Commissioners of Inland Revenue, [1904] 2 KB 658. A contract of insurance has three marks: the insured obtains a benefit on the happening of an event; the event involves uncertainty, whether as to its occurrence or its timing; and the event is adverse to the interest of the insured. The premium is the consideration.

Five further characteristics follow and each has a legal consequence. The contract is aleatory, so the values exchanged are unequal in the individual case and equal only across the pool, which is why the premium is not returnable merely because no claim arose. It is uberrima fides, which displaces caveat emptor and imposes the disclosure duty of sections 19 and 20 of the Marine Insurance Act, 1963. It is executory on the insurer's side for the whole period. It is personal, insuring the insured's interest and not the thing, so a fire policy does not run with the land. And it is a contract of adhesion, drafted by the insurer, which is the reason for the countervailing rule in M/s Texco Marketing Pvt. Ltd. v. TATA AIG General Insurance Co. Ltd., 2022 INSC 1184, that an exclusion never communicated to the insured cannot be enforced against him.

Is it a contract of indemnity?

The answer has three parts.

The content of the indemnity principle is Brett L.J.'s in Castellain v. Preston, (1883) 11 QBD 380, and the facts are worth giving because they show how far it reaches. The vendor of a house had insured it. Between contract and completion a fire damaged the property, and the insurer paid the vendor. The purchaser then completed and paid the full purchase price, so the vendor had suffered no loss at all. The Court of Appeal ordered the vendor to repay the insurance money to the insurer, Brett L.J. saying that as between the underwriter and the assured the contract is a contract of indemnity and of indemnity only, and that the assured shall never be more than fully indemnified. Subrogation, contribution and the bar on recovery beyond the loss are all corollaries of that single sentence.

Part two: life insurance 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 Anchor Life Assurance Company had granted four policies on the life of the Duke of Cambridge, totalling £3,000, to a Reverend Wright, and had reinsured £1,000 of that risk with the defendants; Wright's policies were afterwards cancelled, so Anchor's own interest in the Duke's life ceased, yet Anchor kept up the reinsurance premium until the Duke died, and Dalby sued on the reinsurance as Anchor's public officer.

Is it a wagering agreement?

The resemblance is genuine and should be conceded before it is answered. In both, a small sum buys a promise of a large one, contingent on an uncertain event. Historically the two were not distinguished: eighteenth century London saw open betting on the lives of public figures and on the arrival of ships in which the bettor had no interest, and the Life Assurance Act, 1774 was passed to stop it.

The distinction is insurable interest and nothing else. A wagerer has no exposure until he bets; he creates his risk by contracting, and if the event does not occur he is where he would have been anyway. An insured is already exposed; the risk exists independently of the policy, and the contract only transfers a loss he would otherwise bear. The insured is seeking restoration; the wagerer is seeking gain.

Macaura v. Northern Assurance Co. Ltd., [1925] AC 619, shows how strictly the requirement is applied. Macaura sold the timber on his estate to a company in which he owned every share and to which he was the principal creditor, then insured the timber in his own name. Within a fortnight almost all of it burned. The House of Lords held he recovered nothing: the timber belonged to the company, and neither a shareholder nor a creditor has any legal or equitable interest in the company's property. The commercial reality was that he bore the whole economic loss, and it made no difference. Had he been allowed to recover, the policy would have been a wager on a stranger's property.

The time at which the interest must exist differs by class, and the divergence is a direct consequence of the indemnity question. By section 8 of the Marine Insurance Act, 1963 the assured must be interested at the time of the loss though not necessarily when the insurance was effected, which is what makes the floating policy under section 31 possible. In fire and other property insurance the interest must exist at both dates. In life insurance it need exist only at inception, which is Dalby.

Whether it is a contract of indemnity must be answered in three parts. Property, marine, motor own damage and liability policies are contracts of indemnity in the Castellain v. Preston sense though not within section 124 of the Contract Act, and they carry subrogation under section 79, contribution under section 80, average under section 81, and the requirement of interest at the date of loss. Life and personal accident policies are not indemnities, on the authority of Dalby, and carry none of those consequences. The valued policy under section 29 is an agreed measure that the statute makes conclusive absent fraud.

Whether it is a wagering agreement is answered by one requirement, insurable interest. Section 30 of the Indian Contract Act, 1872 and section 6 of the Marine Insurance Act, 1963 make a policy without interest void, section 7 defines the interest and Lucena supplies its rationale, and Macaura demonstrates that the requirement is legal and not economic. Insurance is lawful because the insured stands only to lose by the event; a wager is void because the parties stand to gain by it.