Indemnity in Marine Insurance - Assignment Example

Indemnity in Marine Insurance By 19, Mar A contract of marine insurance is aimed at compensating the insured person in case the risk insured against attaches. Compensation takes the form of indemnity. Indemnity is a principle derived from common law, and it is well illustrated in this paper using case law. This paper shall conspicuously show how this principle operates in insurance law. This assignment is geared towards critically analyzing the role of the principle of indemnity in compensation for marine insurance. Channel J. In Prudential Assurance Company Ltd v. Inland Revenue Commissioner [1904] 2.K.B. 658 Page 663 defined a contract of insurance as “a contract of insurance then must be a contract for the payment of a sum of money or some corresponding benefit such as the rebuilding of a house, or the repairing of a ship, to become due on the happening of an event which event must have some amount of uncertainty about it and must be of a character more or less adverse to the interest of the person effecting the insurance. … it must be a contract whereby for some consideration usually but not necessarily for periodical payment called premiums you secure to yourself some benefit usually but not necessarily the payment of a sum of money upon the happening of some event.” Consequently, from the definition, requirements for existence of a valid insurance contract are clear. There must be insured, who pays premium to the insurer, to underwrite a risk, that has some amount of uncertainty, and which is beyond the control of either party. The insured is the person who takes the insurance i.e. pays the premium. He must have some insurable interest in the subject matter. With regards to marine insurance, Section 5(1) of the Marine Insurance Act of U.K, every person has an insurable interest who is interested in a marine adventure. German rules define insurable interest as any monetary interest of a person in the safe completion of a marine adventure by ship or cargo. They state that the interest could be in the vessel, the goods carried, the profit and commission dependent on the safe arrival at the destination of cargo (expected profit), the charter hire, passage money and any other claims secured on the property at stake in a marine adventure. Consequently, any person with any of the above interest can insure. With regards to risks, it is a state in which there is an opportunity of an adverse deviation from a desired outcome. Risk is measured by the probability of loss in that the person hopes that loss will not occur. It is classified as either financial and non-financial, dynamic or Static, fundamental or particular, pure or speculative risks. There are several methods of managing risks, for example, risk avoidance, risk retention, risks sharing or risk transfer. Insurance is concerned with the latter. Marine insurance is an ancient form of insurance which was practiced for many years in the Lloyds coffee house. The practice was that merchants wishing to insure would pass a slip of paper with the particulars of the cargo and ship to people desirous of underwriting risk. Those wishing to undertake a portion of the risk would initial the slip and the contract would be concluded when the entire amount of insurance was underwritten. The main function of Marine insurance is underwriting the risks of marine businesses or other businesses that make use of the same. It seeks to compensate the insured to the extent of the risk faced. However, compensation must be to indemnify the insured for the loss that has been incurred as a result of the risk attaching. United Kingdom’s Marine insurance Act 1906 stipulates, “A contract of marine insurance is a contract whereby the insurer undertakes to indemnify the assured, in a manner and to the extent thereby agreed, against marine losses that is to say incident to marine adventure”. Consequently, a contract of marine insurance is essential contract of indemnity. It is the fundamental principle upon which the whole contract of insurance is based and which delineates the rights and obligations of the parties under the contract. In castellain v Preston, Brett J stated that ‘ the contract of insurance contained in a marine or fire policy is a contract of indemnity and indemnity only, and this contract means that the assured, in the event of a loss against which the policy has been made, shall be fully indemnified, but shall never be more than fully indemnified.’ Indemnity is a common law principle by which the insured is not permitted to profit by his misfortune. It means that the function of property insurance is to place the insured within the limits of the policy, and its conditions as far as possible in the same position as he would have occupied had the event insured against not occurred. It means that there should be no more and no less than the restitutio in integrum. However, it is not always a contract of perfect indemnity. Lord summer in British and Foreign Insurance Co LTD V Wilson Shipping Co Ltd (1921) 1 AC 188 at p 214 stated that ‘in practise, contracts of insurance by no means always result in a complete indemnity, but indemnity is always the basis of the contract. The effect of this principle is stated in the words of Blackburn LJ in Arthur Charles Burnard v Rodocanachi and Sons Ltd (1882) 7 AC 333: “The general rule of law is that when there is a contract of indemnity and loss happens anything which reduces, diminishes or even extinguishes the amount which the indemnified is bound to pay and if the indemnifier has already paid it than if anything which diminishes the loss comes into the hands of the person to whom he has paid it becomes an equity that the person who has already the full indemnity is entitled to be recouped by having the amount back.” There are circumstances in which the insured is destined to account for anything over and above the indemnity. For example, where he receives a gift payment or a payment arising from tortuous liability. With relation to gifts, if a third party makes a voluntary payment to the insured, the insurer is not excluded from demanding the profit of such payment if its effect is to diminish or extinguished the insured’s loss. Nevertheless, this is dependent on the purpose of the gift. In Castellain v Preston, the defendant who owned a house Liverpool took out a fire policy on it for 3,100 pounds. Thereafter he entered into a contract to sell the house. However, before the sale was concluded the house was partially destroyed by fire and the insurer in ignorance of the point that there stood a contract of sale paid 330 pounds for the loss. The sale was subsequently completed, and Preston received the entire purchase price. The insurer claimed the 330 pounds on the premise that the contract was one of indemnity and the insured had suffered no loss. It was held that the insured was bound to account for the sum as he suffered no loss. In the words of Brett LJ “That is a fundamental principle of insurance, and if ever a preposition 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.” With regards to payment out of tortious liability, In Darrell v Tibbitts (18879-80) 5 QBD 560, the insured took out a fire policy on his house. Thereafter the house was destroyed by fire on account of a third party’s negligence. The insurer indemnified the insured for the loss. It was held that the insurer was allowed to recuperate the sum paid to the insured as indemnity. The effect of an indemnity is that the insured must not gain or lose by the attachment of gift. The principle of indemnity has its justifications in equity. It is argued that, in its absence, the insured would be unjustly enriched. This principle is given effect by other subordinate principles, for example, subrogation, salvage, reinstatement, contribution and apportionment, etc. this principle ensures that the insurer benefits from the contract of insurance. This principle works in tandem with the principle of subrogation. The drawbacks of the principle of indemnity are elicited by the fact the insurer assumes any profits that arise from the loss. For example if the party causing the loss compensates the insured in an amount excess of the loss incurred, the excess should be given to the insurer. This is demonstrated in Yorkshire Insurance Co. Ltd v Nisbett Shipping Co Ltd (1962) 2 QB 330. The insured owned a vessel “Blasirenevis” which he issued against loss or damaged by marine risks under a valued policy for 72,000 pounds. On /February 13 1945 the ship was damaged in a collision with a Canadian submarine and became a total loss no salvage value on 20 April 1945 the insurer paid the insurer 72,000 pounds for the loss. In September 1946, the insured with the insurer’s approval commenced proceedings against the Canadian government for loss of the ship and the Canadian government paid 336,039.53 Canadian dollars. When converted to pounds the insured realized 55,000 pounds more than the amount paid by way of indemnity. The insured refunded the insurer 72,000 pounds. The insurer sued the insured under section 79(1) of the Marine Insurance Act claiming that it was entitled to the 55,000 pounds under subrogative rights. The court held that the insurer was not entitled to the sum as an insurer cannot recover from the insurer an amount higher than the amount payable by way of indemnity. In conclusion, a contract of insurance is a contract of indemnity meaning that the insured cannot be allowed to recover more that the amount lost at the perils of the sea. References Arthur Charles Burnard v Rodocanachi and Sons Ltd (1882) 7 AC 333. Darrell v Tibbitts (18879-80) 5 QBD 560. Foreign Insurance Co LTD V Wilson Shipping Co Ltd (1921) 1 AC 188 at p 214. Marine insurance Act 1906 sec 5(1) Prudential Assurance Company Ltd v. Inland Revenue Commissioner [1904] 2.K.B. 658 Page 663. Yorkshire Insurance Co. Ltd v Nisbett Shipping Co Ltd (1962) 2 QB 330. Read More