The legal principles of insurance are six as follows –
- Utmost good faith
- Insurable interest
- Proximate cause
However, from these six legal principles, only three of them are applicable to life assurance business – Utmost good faith, Insurable interest and Proximate cause
Utmost Good Faith (Uberrima fides)
This is the legal principle of insurance which states that the two parties to a life insurance contract must disclose all relevant information relating to the contract to each other without being asked for.
These relevant information in insurance are referred to as the ‘material facts’.
The principle of utmost good faith is also known as Uberrima fides and is considered as a fundamental principle generally in all insurance contracts.
The breach of utmost good faith may give the aggrieved party the following three remedies:
- To repudiate the contract from the policy inception.
- To sue for damages in addition to the above (if any damages suffered).
- To waive his rights under (i) and (ii) above
This is the legal right to insure.
What insurable interest stands for is to establish that the proposer has a legal right to effect a valid life assurance contract.
In life assurance, the insurable interest that governs the amount of the benefit which would be recovered at the time of the claim was that existing at the inception of the life assurance contract – this was laid down as a decision in the case of (Dalby Vs. The Indian and London Life Assurance Company in 1854) and this is further emphasized in the Life Assurance Act 1774, which is otherwise known as the Gambling Act.
Thus, in life assurance, insurable interest is only needed at the inception of the policy.
Some of the features of insurable interest in life assurance are :
- It must be definite. That is, it excludes an expectation of future benefit.
- It must be capable of financial valuation.
- It must be legally valid and subsisting.
Some examples of how and when an insurable interest may exist in life assurance include:
- A man or woman has an insurable interest in his/her life to any amount
- A man also, has an insurable interest in the life of his wife & vice versa.
- A creditor on the life of his debtor(s) to the extent of the loan amount plus any interest agreed upon
This is defined in the case of Pawsey Vs. Scottish Union and National (1907) as an active, efficient cause that sets in motion a train of events which brings about a result without the intervention of any force started and working actively from a new and independent source.
Proximate cause is the legal principle of insurance that governs the event(s) or contingency(ies) that is/are covered under the life assurance policy.
Thus, where a death claim occurs as a result of an event or contingency not covered in the ordinary course of the life policy, it means that the life office is not legally liable for such a death claim
However, please note that, a life office may still make a payment for death claims where it is not legally liable.
This in insurance term is referred to as the ‘Ex-gratia payment’.
An ex-gratia payment may be described as a payment made when an Insurance company is not legally liable to the loss