Issues on the Law of Insurance - Essay Example

? INSURANCE LAW The Law of Insurance Introduction The law of insurance is an agreement between two parties where one person, known as the insurer, agrees to pay another person, known as the assured, a certain amount of money in case of uncertainty. The assured, has to pay some money each month known as the premium, so that the agreement can be effective. In a real case in a court of law, insurance was defined by “Lawrence, J. in LUCENA v CRAUFURD” as "a contract by which one party in consideration of a price paid to him adequate to the risk becomes security to the other that he shall not suffer loss, damage, or prejudice by the happening of the perils specified to certain things which may be exposed to them (Dobson, 1997)”. For the agreement to be effective, the assured has to inform the insurer of certain information about the thing that he or she wants to be insured. The assured can be an individual or a company and is expected by law to insure something that has money value. In other cases, the person or the company can insure a person who she or he values, for example, a wife insuring her husband. Scenario Steve is a customer who has an insurance policy to cover the house which he constructed in 1940. When he was agreeing with Home Protection Insurance to cover his house, he said that the house was built using concrete blocks but in reality it was built using straw bale. He failed to provide information on the strength of the building materials even though the company asked him. One month after getting the cover to protect his house, a severe storm damaged his house together with the items inside the house (Kelly, 1997). Analysis and facts Steve should have been aware of the following facts so that the Home Protection Insurance Company could compensate him when his house was damaged by a severe storm. The request to insure the house by Home Protection Insurance was intended by Steve but he forgot to disclose all the information concerning his house. For example, he did not mention that his house was very old and that it was built with materials that could not last long, therefore, increasing the risk to the company. If the company could have known this information by the time they were writing the policy they could have maybe increased the premium per month (Dobson, 1997). The communication between Steve and Home Protection insurance was not properly done and what was insured was not clearly described. The communication process was also not clear because the kind of damage which Steve insured against was not disclosed. For example, neither Steve nor the Home Insurance Company stated whether it was a fire insurance or burglary. Steve did not also take time to test whether the insurance cover could work for him before officially signing it. The law of insurance states that, “the alleged offer must be in force at the time when the other party purports to accept it.” The time taken before the insurance fully comes into force is important because the customer can gauge how well it can work for the intended needs. Steve did not take this into consideration when he was taking the cover (Ellison, 1997). The agreement between Home Insurance Company and Steve is important when claiming the insured value of money after damage has occurred. A detailed analysis of every factor that can arise and affect the agreement should have been discussed. The facts which are known to the Home Insurance Company about house insurance covers, should have been discussed. Home Protection Insurance Company is well experienced in issues dealing with house insurance and, therefore, it has fine details that people do not recognize when it comes to dealing with house covers. Another important detail the law of insurance is concerned with, and that should be captured when formulating an insurance cover, is the information which is hidden. However, Home Insurance Company can get this information by deeply interviewing the customer (Dobbyn, 2003). Although the insurance company tried to interview Steve, most of the information that was to affect the cover was not captured. For example, through interview the Home Protection Insurance Company could have known that Steve’s house was so old to an extent of being vulnerable to more risk. Although, Steve lied that his house was built of concrete blocks, Home Protection Insurance Company did not investigate this fact fully. The company did not also bother to investigate the quality of the concrete blocks, the location of the house since some places are prone to constant storms, and the year of construction. These facts are important because the law of insurance states that, “failure to disclose a material fact within the actual or imputed knowledge of the insured renders the policy voidable at the option of the insurer.” In a case “BLACKBURN, LOW AND CO. v VIGORS (1887) Lord Halsbury stated that, where a fact could have been discovered by the assured that he had made reasonable enquiries, he is therefore guilty of a breach of duty towards the insurers who would be entitled to avoid the policy. This is true because his ignorance was due to his intentional failure to make such enquiries as he might reasonably have been expected to make in the circumstances (Proteach, n.d.).” The insurance policy between Steve and Home Protection Insurance did not cover the items inside the house. When the storm occurred, everything including the items was destroyed. Any attempt by Steve to claim the damage from the insurance concerning his items would not be considered since it was not captured in the policy (Baker, 2003). Consequences Steve cannot rely on the insurance cover because he together with the company did not disclose important information that, the real material used to construct his house was straw bale. The company did not investigate whether the house was constructed using concrete blocks. In addition, they did not show whether the area where Steve’s house was located might have been prone to severe storms that increase the risk of his house being damaged. The law of insurance states that, “It is an important principle of insurance law that the utmost good faith must be observed by each party”. Such a case was ruled by “Lord Mansfield in CARTER v BOEHM (1766)” and it was as follows: "Insurance is a contract upon speculation. The special facts, upon which the contingent chance is to be computed, lie more commonly in the knowledge of the insured only: the underwriter trusts to his representation, and proceeds upon confidence that he does not keep back any circumstance in his knowledge, to mislead the underwriter into a belief that the circumstance does not exist, and to induce him to estimate the risk as if it did not exist. The keeping back such circumstance is a fraud, and therefore the policy is void”. The policy partly failed due to Steve and Home Protection Insurance faults. Therefore Steve cannot claim any money from Home Protection Insurance. The insured contract between Home Protection Insurance and Steve should be considered as not valid according to the law. The company should also refund to Steve the rest of the money he had paid as premium, until when the incident occurred. However, if Steve fills that he has been cheated by the company, he should go to a court of law and file a case against Home Protection Insurance. A third party can also take both Steve and Home Protection Insurance to court for bleach of insurance laws (Proteach, n.d.). Double Insurance If Steve had insured his house with Home Protection Insurance Company and with another second company, then he had double insured his house. For the cover to qualify as double insurance, the two insurance companies must have insured the house on the same risk such as the risk on fire. The amount of money that the two companies can pay Steve, in case of property damage, exceeds the total worth of the house (Fischer, 1994). Since the sum of money exceeds the total worth of the house, and that there are more than one policy at the time of loss on the same house, Steve can recover the total amount from any of the company. The insurance company that will pay more than the other can claim the excess from the other company. For the payment of damage to be effective, the following conditions must be fulfilled. First, the two companies must have insured the same item with a similar policy and risk. Steve should have, therefore, disclosed accurate information to the two companies so that they capture the same information on the agreement. Second, the two insurance covers must have been taken by the same person. Double insurance, therefore, involves three parties; the two insurance companies and one person who wish to take a cover on an item or a person. Third, the two policies must be in force and recognised by the law when the damage occurs. If for example, Steve had not paid premiums for two months, the agreement would not be in force and he cannot claim any money from any of the insurance company. Finally, none of the insurance company should withdraw from the payment of damages to Steve (Kelly, 1998). Average Clause If Steve agreed on a policy that contains “subject to average clause,” he can only recover the amount of money that matches the property he has insured (Lowry, 2005). This will apply if Steve did not fully insure the whole house, but part of it and which gets damaged. For example, if Steve house is worth $200,000 and he insures the house up to $100,000, when the damage occurred he could have only claimed money that is equivalent to the $100, 000 that he insured. This clause is written in insurance policies to ensure that insurance companies share losses and that customers insure their property fully. Indemnity An indemnity is the amount of money paid by one person to another as a way of compensation for a certain loss suffered by the second person. The person who pays the money as damage must not be involved in causing the damage. Payments made to the person who suffered the loss include the repairs, cash payments and replacements. In the law of insurance, indemnity rule pays the beneficiary of a policy for the real economic losses up to the amount of money limited by that policy. This implies that the more premiums someone pays to an insurance company, the more money he or she will be paid in case of damage (Proteach, n.d.). The indemnity rule is very important to insurance companies in case of damage. This is because the person who has insured his or her property has to prove to the insurance company, the amount of loss he or she has suffered before the company can pay the damage. The damage to be paid by the insurance company is the amount that the person who suffered the loss will be able to prove. It does not depend on what can be seen to have been damaged. However, if the person who suffered the damage has a life insurance, the amount to be paid does not have to be proved. The death of the person who has insured his or her life demands on the insurance company to pay that person the full amount that was insured. For example, “In Dalby v The India and London Assurance Co. it was explained that a life assurance policy is not a contract of indemnity. This is because a human being has no market value”. If a cover contains an “Extended Period of Indemnity Endorsement” and a business that insured suffers a loss, the case is different. The insurance company will help the business recover all the damage up to the moment the business is back to normal operations and it starts making a profit (Association of Business Executives, n.d). In conclusion, this paper defines the law of insurance within a practical scenario involving Steve and Home Protection Insurance. The circumstances that led to Steve agreeing to take an insurance cover for his house with Home Protection Insurance have been discussed. The consequence of the agreement is that Steve cannot claim any damage from Home Protection Insurance Company. The concept of indemnity and double insurance has also been analysed on a number of cases. References Top of Form Top of Form Association of Business Executives. (n.d.) Principles of Business Law retrieved from http://esmanagementschool.files.wordpress.com/2008/06/prinbuslaw.pdf Baker, T. (2003). Insurance law and policy: Cases, materials, and problems. New York: Aspen Publishers. Dobbyn, J. F. (2003). Insurance law in a nutshell. West Publisher: Eagan, Minnesota. Dobson, P. (1997), Charlesworth’s Business Law, 16th Edition; Sweet and Maxwell, London. Ellison, J., Bedingford, J. and Hardson (1997), Business Law, 4th Edition; T, Harrison Law Publishing, BEP, Sunderland. Fischer, E., & Swisher, P. N. (1994). Principles of insurance law. New York, NY: M. Bender. Kelly, D. and Holmes, A. (1997), Principles of Business Law, 2nd Edition; Cavendish Publishing Ltd., London. Kelly, D. and Holmes, A. (1998), Questions and Answers Business Law; Cavendish PublishingLtd., London. Lowry, J. P., & Rawlings, P. (2005). Insurance law: Doctrines and principles. Oxford: Hart Pub. Proteach, L. (n.d.). The Economist Undercover Retrieved from http://proteachlennox.kbo.co.ke/_item?item_id=044001 Bottom of Form Bottom of Form Read More