PRINCIPLES OF INSURANCE

The business of insurance involves contracts which are bonded by law and hereby guided by
principles. There are six basic Principles of Insurance, namely;
i. Principle of Insurable Interest
ii. Principle of Utmost Good Faith (Uberrimae Fidei)
iii. Principle of Indemnity
iv. Principle of Subrogation
v. Principle of Contribution
vi. Proximate Cause
Principle of Insurable Interest
Insurable interest is the legal right to insure. The Proposer must have some legally recognizable
relationship with the subject matter of insurance. The Proposer/ Insured must also have interest
in the preservation of the thing being insured such that he will suffer financially on the
happening of the peril insured against. The insured is said to have insurable interest in a thing if
he has a benefit from its existence or prejudice (suffer loss) from its destruction. This interest
must be an enforceable one, real and of pecuniary nature.
In essence, Insurable interest exists when the insured/assured has some legally recognized
relationship with the subject matter such that he will be interested in its preservation since its
safety would be beneficial to him, whereas its destruction would be prejudicial to him that is he
would suffer a financial loss.
However, the absence of insurable interest renders an insurance contract void and of no legal
effect. Such a contract is referred to as a mere wager or gambling contract.
Insurance Acts and Insurable Interest
There are various Acts that has been enacted to guide the operations of insurance. It is worthy to
consider what some of these Acts stated about Insurable Interest.
The Nigerian Marine Insurance Act of 1961 in Section 7(1) stated thus;
“subject to the provisions of this Act, every person has an insurable interest who is interested in a
marine adventure” Section 7(2) then added “In particular a person is interested in a marine
adventure where he stand in legal or equitable relation to the adventure or to any insurable
property at risk therein in consequence of which he may benefit by the safety or due arrival of

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insurable property, or may be prejudice by its loss, or damage thereto, or by destruction thereof,
or may incur liability in respect thereof.”
Also, The Insurance Act 2003 in Section 56(1) stated thus;
“A policy of insurance made by a person on the life of any other person or any other event
whatsoever shall be null and void where the person for whose benefit or on whose account the
policy of insurance is made has no insurable interest in the policy of insurance or where it is
made by way of gaming or wagering”.
In Section 56(2) further stated that;
“A person shall be deemed to have an insurable interest in the life of any other person or event
where he stands in any legal relationship to that person or other event in the consequence of
which he may benefit by the safety of that person or event or to be prejudiced by the death of that
person or the loss from the occurrence of the event.
From the submission of both Acts, it can be confirmed that an Insurance contract without an
insurable interest is a mere wager or gambling.
Attributes of Insurable Interest
Before an insurable interest should exist, the following essential attributes must be present;
(i) There must be property, life or limb, rights, interest, or potential liability devolving
upon the insured capable of being insured against.
(ii) Such property, life or limb, rights, interest, or potential liability must be the subject
matter of the insurance
(iii) The insured or the policyholder must bear some relationship recognized by law to the
subject matter, whereby he would benefit by the safety of the property, life or limb,
rights, interest or freedom from liability.
Persons Deemed to have Insurable Interest
1. Own Life: A person is deemed to have an insurable interest in his own life. The life is
priceless to him and he takes all necessary precautions to preserve it.
2. Husband and Wife: A wife can take life assurance policy on the life her husband and
vice versa.
3. Absolute and Unconditional Owners of Property: The actual owner of a property such
as house, vehicle, goods etc is deemed to have insurable interest in his own property.

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 4. Buyer of Property or Goods: The buyer of a property has insurable interest in it but
effective from the date that ownership is transferred to him.
5. Mortgagee and Mortgagor: In property insurance, a person can insure property without
necessarily being the owner. Therefore, a mortgagee that is, one who has advanced
money on the security of a property has an insurable interest as well as the mortgagor.
6. Lessor and Lessee: Where a house is let on lease, either the lessor or the lessee or both
may insure it, since they will suffer financially if the property is destroyed.
7. Trustee and Beneficiary: The trustee of a property as well as the beneficiary have
insurable interest in the property and can insure it.
8. Creditor: A Creditor has an insurable interest on the life of his debtor since any
unfortunate event that befalls the debtor’s life would make the creditor to suffer
financially. The creditor can take out a credit insurance policy on the life of the debtor up
to the amount of the debt.
9. Contract Guarantee: In contract guarantee insurance, the principal contractor has
insurable interest in the due and proper performance of the contract work undertaken in
the contract.
10. Potential Liability: Where there is a potential liability, any person who may incur
liability has an insurable interest. E.g. Employers in Employers’ Liability Insurance
Policy.
Utmost Good Faith (Uberrimae Fidei)
In insurance contracts, the doctrine of Caveat Emptor does not apply. Contracts of insurance are
founded not merely on Good Faith but Utmost Good Faith. The principle requires that all
relevant information and material facts which may affect the contract of insurance must be fully
and truthfully disclosed by both parties, and that failure to disclose the relevant information
renders the contract voidable at the instance of the aggrieved party.
The requirement of Utmost Good Faith is an implied condition in an insurance contract. The
implied condition makes it incumbent on the parties to fully disclose all material facts that might
affect the risk to be underwritten, because the parties to the contract might be in unequal
positions with respect to underwriting information on one hand (from the insured) and the
contractual terms of the contract from the insurer on the other hand.

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Insurance Act and Utmost Good Faith
The duty of disclosure of information in respect of insurance contracts as stated in Marine
Insurance Act 1961 is of equal application to other classes of insurance. The Section 19 of
Marine Insurance Act 1961 states
“A contract of Marine Insurance is a contract based upon Utmost Good Faith and if the Utmost
Good Faith is not observed by one party, the contract may be avoided by the other party”
Section 20(1) further stated, “Subject to the provision of this section, the assured shall disclose to
the insurer before the contract is concluded every material circumstance which is known to the
assured, and the assured shall be deemed to know every circumstance which in the ordinary
course of business ought to be known by him. If the assured fails to make such disclosure, the
insurer may avoid the contract”.
And Section 20(2) added that “Every circumstance is material which would influence the
judgment of a prudent insurer in fixing the premium or determining whether he will take the
risk”.
Material Facts
Disclosure of material facts is essential in a contract of insurance. A material fact is therefore
that piece of information which would affect the judgment of a prudent and rational insurer in
considering whether he would underwrite the risk and if so at what premium and terms.
In Insurance contracts, the following facts are material and should be disclosed;
(i) Greater than Normal Risk: All facts which will likely make the amount of the loss
greater than expected must be disclosed. Example: the existence of a petrol station
adjacent to a house being proposed for a fire policy.
(ii) Decline of Previous Proposals: Facts such as a proposer of a risk being refused
insurance cover on account of being a moral hazard or special terms imposed on
previous insurance must be disclosed.
(iii) Other Insurance Policies: If the insured has other policies like life assurance or
personal accident policies such facts should also be disclosed. These facts will help
the insurer to evaluate the risk of anti-selection and risk contribution.
(iv) Subrogation Rights: The proposer should disclose those facts which restrict
subrogation rights.

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 (v) Previous Losses: If the proposer has suffered previous losses and made claims on
fire, personal accident, motor vehicle accident, burglary and fidelity guarantee
insurance policies; he is bound to disclose these facts.
Duty of disclosure on the part of the insurer

1. The insurer should not accept an insurance which he knows is unenforceable in law. For
example, when he accepts to insure a consignment of cannabis (Indian hemps).
2. An insurer should not insure a risk which he is not registered to underwrite. An example
is an insurer who underwrites a non-life risk when he is registered to insure only life
assurance business.
3. He should not make untrue statements to the proposer with the aim of inducing him to
enter into the contract.
4. The terms and condition of the contract should be made known to the insured.
5. He should not conceal from the insured those facilities that the insured has that could
reduce the premium payable on the risk. Example is the existence of a water sprinkle in a
premise that is being proposed for a fire policy.

Facts that need not to be Disclosed

While the principle of Utmost Good Faith requires full disclosure of material facts, there are;
however, some facts that need not be disclosed. These are facts, which are irrelevant, of
public knowledge, law or which a reasonable underwriter ought to know.

1. Facts which improve the Risk: This of course is of advantage to the insurer. An example
is the existence of a functional fire alarm and a water sprinkler in the premises proposed
for fire insurance. if the insured risk should occur the chances are the extent of the
resultant loss would be mitigated due to the existence of the facilities.
2. Facts which are known to everybody: For example that medical doctors work in
hospitals, or that Abuja is the Capital of Nigeria, are facts of general knowledge.
3. Facts known by the Underwriter: Facts that are supposed to be known by the insurer in
the ordinary course of his business. For example, that a factory worker faces more
industrial hazard than an office executive.
4. Matters of Law: Everybody is presumed to know the law as ignorance of the law is no
excuse.
5. Facts not known to the Proposer: A party to an insurance contract is not expected to
disclose what he does not know, if for example, a proposer did not know that he had a
cancer because it was in its early stage and he stated that he had no cancer in the proposal
form, that non-disclosure cannot be held against them.

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Suppression of Material Facts

The doctrine of Utmost Good Faith forbids either party to an insurance contract from concealing
from the other what he knows privately. The parties are also forbidden from suppressing any
refused insurance by three insurance companies previously and he disclosed that only one
insurance company has declined his proposal he has run foul of the doctrine of utmost good faith
and the contract is voidable at the opinion of the insurer.

Misrepresentation of Materials Facts

Misrepresentation of facts can occur in any contract. A misrepresentation is a false statement by

one of the parties to the contract with the aim of inducing the other party to enter into the
contract. There are two types of misrepresentations. They are (a) innocent misrepresentation;
and (b) fraudulent misrepresentation.

a. Innocent Misrepresentation: An innocent misrepresentation is a false or inaccurate

statement made by one of the parties to a contract which he believes to be true at the time of
making it. If the innocent misrepresentation turns to be false and it was it that induced the
other party to enter into the contract, the misled party can repudiate, that is void the contract.
b. Fraudulent Misrepresentation: A fraudulent misrepresentation is a false or inaccurate
statement made by one of the parties in the contract which he knows to be untrue or believes
to be untrue or is made recklessly without caring whether it is true or not. If the other party
has been misled into entering into the contract by virtue of the misrepresentation the induced
or misled party has right to repudiate the contract. In the case of fraudulent
misrepresentation, the misled party in addition to repudiating the contract can bring an action
for deceit against the other party.

Breach of Utmost Good Faith-Actions Open to the Insurer

The following courses of action are open to the insurer when there is a breach of Utmost Good
Faith by the insured:

(i) Delivery and Cancellation of the Policy: The insurer can bring an action against the
insured to deliver up the policy and for its cancellation.
(ii) Plead breach of Utmost Good Faith: If the policy has matured the insurer may refuse to
pay and wait for the insured to bring an action against him at which the insurer would
plead breach of the principle of Utmost Good Faith.
(iii)Repudiate the Contract: The insurer can repudiate the contract.
(iv) Allow the Contract to Stand: The insurer could overlook the breach and allow the
contract to stand.

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Breach of Utmost Good Faith-Actions Open to the Insured

i. Innocent Misrepresentation: If the misrepresentation of non-disclosure was innocent

and unintentional, and the insurer has voided the contract, he (the insured) is entitled to
recover his premiums.

ii. Payment of Indemnity: Where the insurer fails to disclose some material facts about the
contract to the insured, the insured is entitled to his indemnity as specified in the policy.
In addition, the insured can bring an action against the insurer to claim damages for
misrepresenting facts to him.

In all cases of breach of the principle of Utmost Good Faith, the aggrieved party must elect to
exercise his right within a reasonable time otherwise it would be assumed that he has waived.

Duty of Agent in Disclosure of Facts

When a proposer fills a proposal form through his agent to whom he has given material
information and the agent fails to transmit the information to the insurer the proposer (insured) is
assumed not to have discharged his duty of full disclosure. But if the agent acted on behalf of the
insurer and the material information was not transmitted to the insurer, the insured would have
discharged his duty of Utmost Good Faith.

Concluded Insurance Contract

When an insurance contract has been concluded, the insured is no more required to disclose
changes in materials facts during the currency of the insurance, unless, the contract so stated. If,
however, the contract is due for renewal, the insured must disclose new materials facts that came
to his knowledge when the elapsed contract was in force.

Principle of Indemnity

In insurance, indemnity means putting the insured in the same position that he was immediately before
the peril that was insured against occurred. Indemnity however can be defined as the exact financial
compensation sufficient to place the insured in the same financial position after a loss. Under the
principle of indemnity, the insured cannot claim more than the sum-insured in policy. It is illegal and
against public policy for the insured to recover more than the amount of his actual financial loss thereby
making profit from what is essentially a misfortune.

The principle of indemnity disallows the insured from making profit on the policy. This principle also
seeks to prevent such fraudulent acts. Indemnity is concerned with the value of the loss at the point of the
loss. In other words, the insured cannot claim more than the amount of his actual loss.

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Application of the principle of Indemnity to some classes of Insurance

- Motor Insurance: Motor insurance is more common in Nigeria than other classes of insurance.
Hence, there is a need to examine the application of indemnity in this class of insurance as an
illustration. The comprehensive motor insurance will be used as a reference point.
(i) Partial Loss: A partial loss occurs when the subject matter of the insurance is not
totally destroyed or lost. There is a partial loss when a building is partially damaged
or when all the insured contents of a shop are not stolen. Another example is a car
which may be involved in an accident but may sustain only damage to the headlamps,
have smashed windscreens and dented body.
The principle of Indemnity requires that the insurers have to replace the damaged
parts, carry out the whole body work, spraying and replace the tyres. But if the repairs
and replacement lead to considerable improvement in the value of the old car (if the
car is not new) the insured could be required to contribute towards the cost of the
repairs and replacement because the insured would be getting new for old. However,
insurers often do ignore their having to require the insured to contribute for the
purpose of cultivating goodwill.
(ii) Constructive Total Loss: If a vehicle is involved in an accident and the cost of
repairs would be more than the market value of the car, the insurer might decide to
treat it as a constructive total loss. In that case, the insurer must indemnify the insured
by paying him the pre-accident market value of a vehicle of a similar make, age and
condition.
(iii) Total Loss: A total loss occurs when the subject matter of the insurance is totally
destroyed or so damaged that it cease to be the thing insured or it becomes stolen and
the insured is deprived of it irretrievably. Where there is a total loss, that is, the
vehicle insured is damaged beyond economic repairs or a complete wreck or stolen
the insured will be paid what was the market value immediately before the accident.
(iv) Sum-Insured in Total Loss: Though the sum-insured is the maximum amount
payable by an insurer when a loss has resulted from an insured peril, this is not
always the case. The insurer can at times pay less.
For instance, Mr. Peter Johnson buys a Mercedes Benz 230 on 1st June, for
N2million. He insures it comprehensively for that amount. Two weeks later
government reduces import duties on Mercedes Benz 230 which makes Benz 230 cars
to sell for N 1.8million. if Mr. Johnson Mercedes Benz say in 2 weeks time becomes
accidented and it turns to be a complete wreck, the insurance company can only pay
the sum of N1.8million, which is the new value of Mercedes Benz 230.
If Mr. Johnson is paid the sum of N2million as stated in the contract it means that the
he would be getting more than an indemnity in view of the fall in the market price of
his make of a car. Mr. Johnson is entitled to full Indemnity and his full indemnity is
the market value of the car before the accident occurred. This amount (N1.8million)
would give him a brand new vehicle like the one that the one he lost in the accident.

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 Conversely, if the value of the Benz 230 cars rises to N2.2million as a result of
increase in import duties Mr. Johnson would get an indemnity of N2million which is
the maximum liability of the insurance company in the contract.
(v) Right to Salvage: When an insurer has settled a claim either as a constructive total
loss or a total loss, and provided the insured has been fully indemnified, the insurer
becomes automatically entitled to the salvage or they deem fit. It will be improper for
the insured to keep the salvage after he has been fully indemnified.
(vi) Transfer of Ownership: If an insured has transferred his ownership in an insured
property (e.g. a car) and the property is involved in an accident, the insured is not
entitled to any claim or indemnity. The new owner can also not claim under the old
policy unless he asks for endorsement of the policy to be in his name. if the new
owner (in case of motor vehicle) neither takes a new policy nor has the old policy
endorsed in his name, and rides the motor vehicle on Nigerian roads, he would be
committing an offence under the Motor Vehicles (Third Party) Insurance Act, 1945.

Indemnity in Property Insurance

For buildings damaged or destroyed by fire, the amount payable to the insured would be the cost
of repairing or re-instating the building to the same condition it was subject to a maximum of the
sum insured.

(i) Agreed Value: Many insurers adopt the “Agreed Value” Policy in property
insurance. Under this policy the insurers agree at the onset that they will accept the
value of the insured property as stated on the policy as the true value and in the event
of a total loss will settle the claim for the sum-insured.
It is proper for insurers to state from the onset what the amount of indemnity will be
rather than to measure indemnity when a loss has occurred. If this is always done,
disputes between the insurer and the insured as to the amount of the indemnity would
be minimized if not eliminated.
If the contents of a house are insured against fire risk or burglary, and there was a
partial loss, that is, only part of the building or some of the contents were destroyed
by fire or stolen, the insured will be indemnified only in respect of what was actually
destroyed by fire or stolen.
(ii) Goods or Merchandise: If goods or merchandise in a trader’s shop are insured under
a fire or burglary insurance policy, and the goods or merchandise become destroyed
by fire or stolen, the insured will be entitled to full indemnity which in this case
would be the cost prices of the goods and not the selling prices. The trader’s profit
margin is not taken into account unless the policy includes consequential loss of
profits.
(iii) Jewelries and Works of Arts: In the insurance of jewelries and work of arts such as
rare paintings and sculpture, the insurers will only accept liability for the insured sum
as stated in the policy and not more. Insurers do not pay for the additional sentimental
values attached to an article of jewelries or work of art.

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Indemnity in Case of Depreciation

Indemnity is concerned with the value of the loss at the time of the loss. For instance, Mr.
Anthony Thomas buys a brand new car for N1million and insures it for that sum and drives it for
10months without an accident. If on the 11th month the car become involved in an accident and
becomes a total loss, the owner cannot expect to receive N1million from the insurers because the
value of the car would obviously be less after eleven months of usage. The insurer will pay the
intrinsic (market) value of the car at the time of the loss.

Indemnity in Excess of Loss

When an insurance policy is subject to excess of loss, it means that the insured is his own insurer
up to the limit of the excess. The liability of the insurance company starts to run when the limit
has been exhausted. For example, if the limit of the excess is N100,000 and an insured peril has a
loss of N500,000 the value of indemnity to be made available by the insurance company would
be N400,000.

Indemnity in Marine Insurance

In marine insurance, indemnity can be in accordance with a valued policy or the ‘insurable
value’.

Valued Policy: In a valued policy the value of both the ship and cargo is fixed in advance
usually at the time the marine peril is being underwritten. In the event of a total loss, the amount
stated in the policy is the maximum indemnity payable by the insurers.

Insurable Value: If the policy is an unvalued one, the amount of indemnity shall be the
insurable value of the risk. Section 18 of the Marine Insurance Act 1961 has described how
insurable value should be measured. It states “subject to the express provision or valuation in the
policy, the insurable value of the subject matter insured shall be ascertained as follows:

(a) “In Insurance on ship the insurable value which in the case of a steamship, includes also
the machinery, boilers. Coals and engines stores if owned by the assured and in the case
of a ship engaged in a special trade, the ordinary fitting requisite for that trade, is the
value at the commencement of the risk, of the ship including her outfit, provisions and
stores for the officers and crew money advanced for seamen’s wages and other
disbursement (if any) incurred to make the ship fit for the voyage or adventure
contemplated by the policy plus the charges of insurance upon the whole”

(b) “In Insurance on freight whether paid in advance or otherwise, the insurable value is the
gross amount of the freight at the risk of the assured, plus the charges of insurance”

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 (c) “In Insurance on Goods or Merchandise: The insurable value is the prime cost of the
property insured, plus the expenses of and incidental to shipping and the charges of
insurance upon the whole”

(d) “In Insurance on any other subject matter, the insurable value is the amount at the risk of
the assured which the policy attaches plus the charges of insurance”.

In practice however, valued policies are more generally used in preference to the insurable value
policies.

Partial Loss

If a ship that is on a voyage is damaged, the insured shall be entitled to a reasonable cost of the
repairs less customary deductions but not exceeding the sum –insured in any one voyage. If the
partial loss is in respect of goods, merchandise or other moveable, the proportion damaged shall
be indemnified.

Indemnity in Pecuniary Insurance

In pecuniary insurance policies such as fidelity guarantee and cash-in-transit insurance policies
the amount of indemnity is the actual amount lost as ascertainable from the books.

Non-Indemnity Insurance Policies

Some contracts of Insurance are not contracts of indemnity. They are Life Assurance and
Personal Accident Policies. They are non-indemnity contracts because it is not possible to assess
the value of a life or a limb and pay adequate indemnity or compensation on it. As a result of
this, a person can take two or more life assurance policies on his life provided he can pay all the
premiums.

Indemnity in Liabilities Insurance

Liabilities insurance are those group of insurance policies that are taken by individuals against
unexpected liabilities.

(i) Credit Insurance: Credit insurance can be taken by a creditor on the life of the
debtor up to the amount of the debt.
(ii) Employers’ Liability Insurance: Under the Workmen’s Compensation Insurance
Act, 1987, it is obligatory and compulsory for all factory owners to take liabilities
insurance policies in respect of their factory workers who might involved in industrial
accident while at work.
(iii) Professional Indemnity Insurance: The policies under this are taken out by
professionals, such as doctors, insurance brokers, etc. in respect of any liability that
might arise against them in the course of performing their professional duties.

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In any of the above cases, the maximum amount of indemnity payable by the insurer is the sum
insured as stated in the policy, however, the third party claims exceed the limit of indemnity
stated in the contract, the policy holder would have to bear the amount in excess of the limit.

Methods of Providing Indemnity

Indemnity which is at the heart of every insurance contract can be effected or provided through
(a) cash payment (b) replacement (c) Repairs and (d) Re-instatement

a. Cash Payment: In many cases, cash payment is the most suitable means of settling
claims. The insurer and the insured could agree that cash payment should be made to the
insured to indemnify him for the loss.
b. Replacement: Where there is a plate glass insurance policy on the windows of a shop,
and the glass become broken settlement has to b by replacement as soon as possible. The
objectives is to forestall further loss or damage through theft or rain.
In motor insurance, where the headlamps, windscreens, bumpers and tyres become
damaged in an accident indemnity is by replacement of the parts. If a vehicle, which is
comprehensive insured is stolen, the insurers might decide to replace it.
If a person insures a full replacement value of his property, the insurance company will,
in the event of the destruction of any item replace it with a new one or pay the full cost of
replacement.
c. Repairs: This is more prevalent in motor claims. If the damage is partial, the insurer
would arrange for the car to be repaired at a (panel beater) spray painter’s workshop. If it
is a house whose roof is blown off, the insurers would arrange for the immediate repairs
or replacement so as to avoid further damage through rain getting into the house.

In Marine Insurance, if a ship suffered partial damage, indemnity is by repairs to the affected part
of the ship.

(a) Reinstatement: This is more common in fire policy on buildings. Re-instatement in fire
policy on building refers to the restoration or building of the damaged or destroyed
building to its former condition. Re-instatement can often be insisted upon by the insurers
where fraud or arson is suspected, so that the insured does not obtain cash illegally.
Reinstatement could also be insisted upon by the insurers if the cost of rebuilding the
damaged or destroyed would be less than the cash repayment. However, most policies
contain conditions which give the insurer the right of exercising an option as to whether
they will pay cash, replace, repair or reinstate. Although for goodwill purpose the insurer
may comply with the Insured’s requirement in respect to the method of indemnification.

The Principle of Subrogation

The principle of subrogation applies to all insurance contracts that are contracts of indemnity. It
states that if a loss occur in respect of an insured subject matter, through the negligence of a third

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party, the insurer after paying (indemnifying) the insured, may sue the third party who caused the
damage/loss in the name of the insured.

Hence, subrogation can be defined as the right of one person haven indemnified another under a
legal obligation to do so, to stand in place of that other and avail himself of all the rights and
remedies of the other whether already enforced or not.

In insurance however, subrogation refers to the right of an insurance company (after he has
indemnified the insured) to take over any right, which the insured has against a third party which
was primarily responsible for the loss. The insurer could then sue the third party so as to
reimburse himself or recover the payment already made to the insured.

Subrogation is a Corollary of Indemnity. That is, it is a direct flow from the principle of
indemnity which seeks to prevent the insured from making a profit from a loss.

Illustration

If Mr. Peter Okoro insures his car with XYZ Insurance Company and the car got involved in
accident caused by Mr. Okonkwo, Mr. Okoro is entitled to claim from XYZ insurance company,
but if Mr. Okoro is allowed to go ahead and sue and claim from Mr. Okonkwo which is a third
party who negligently caused the accident he would have made a profit from the accident.

The principle of subrogation requires that when the insured has been indemnified, he has to
subrogate (give up) his right under the policy to the insurer who would thereafter take necessary
action against the third party who was primarily responsible for the loss.

Conditions for Subrogation

1. Indemnity before Subrogation: The insurer would not be entitled to any subrogation right in
respect of a loss which he has not paid for. This is a common law position
2. Claims by the Insured from the Third Party: If an insured has been indemnified and recoups
some amount from the person who was responsible for the accident, equity demands that the
insurer is entitled to have the amount back. The maxim in equity is that the insured must not
take with both hands.
3. Where the Insured has No Right: If an insured has been indemnified, the insured subrogates
his rights to the insurer under the policy so that the insurer can reimburse himself from the
third party who caused the loss. But if the insured has no right of action, none passes to the
insurer.
4. Claims in Excess of Indemnity Paid: In the exercise of his subrogation rights the insurer is
entitled to an amount equal to that which he used in indemnifying the insured. Equity
therefore requires than any excess recovered by the insurers should be handed over to the
insured.

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 Inter-company Agreements on Subrogation

Insurance companies sometimes enter into agreement among themselves in order to resolve
issues that emerge from the operation of the principle of subrogation.

These agreements are as follow;

(a) Knock-for-Knock Agreement: in most cases subrogation rights are exercised by one
insurance company against another. In other to save time and expenses in arguing over
liabilities many insurers become part of some agreements. Under such agreement
subrogation rights are waived against each other who are signatories to the agreements.
This agreement is more common in motor vehicle insurance and it is known as “Knock-
for-Knock Agreement”.
(b) Third Parties Liability Sharing Agreement: Where third parties that is pedestrians or
passengers, are injured as a result of an accident between two vehicles that are insured by
insurance companies who are parties to such agreement, the insurers will share any third
party claim between themselves on equal basis.

The Principle of Contribution

Contribution is the right of an insurer who has paid under a policy to call upon other insurers
who are equally or otherwise liable for the same loss to contribute to the payments. The principle
of contribution states that in an insurance contract of indemnity the insured can take more than
one insurance policy of the same peril. But that in the event of a loss he cannot claim more than
the amount of the loss. If he claims from one insurance company he cannot claim from any other.
If the insured claims from any other insurers, it would be tantamount to breaching the principle
of indemnity, which forbids the insured from making a profit from the incident.

But if one insurer has paid for the whole loss when there are multiple insurers, he then proceeds
to recover a proportionate contribution from the other insurance companies or insurers.

The principle of contribution is supported in the case of North British & Mercantile Insurance
Company Vs Liverpool & London and Globe Insurance Company (1877) 5, Ch.D 569. In this
case, it was stated that “contribution exists where the thing done is done by the same persons
against the same loss, and to prevent a man first of all from recovering more than the whole loss
or if he recovers the whole loss from the one which he could have recovered from the other, then
to make the parties contribute ratably. But that only applies where there is the same person
insuring the same interest with more than one office”.

Contribution Conditions in Policies

In non-marine insurance policies, the practice is to insert contribution conditions into them to the
effect that if an insured has two or more policies on the same subject matter, he must claim under
all the policies by recovering a pro-rata proportion from each insurer. The inclusion of this clause

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in policy conditions supported in the decided case of North British & Mercantile Insurance
Company Vs Liverpool & London and Globe Insurance, Supra.
The objectives of the inclusion of these conditions in policies are:
(a) To save the insurer who alone might pay for a loss the trouble of having to negotiate the
method of sharing the loss with the other insurers.
(b) To dissuade policy holders from having multiple insurance policies on non-indemnity
perils.
Calculation of Ratable Proportions
Where a loss has occurred from an insured risk which is underwritten by more than one
insurance company, each of the insurers shall be proportionately liable to the sum insured with
him. Below is the formula for calculation the ratable proportions:
Rateable Proportion = Sum insured with each insurer x Loss
Total sum insured by all parties 1

Enforcement of Contribution Clause

Insurers always want to ensure that the insured abides by the tenets of the Principle of
Contribution. In this regards, when an insured wants to put up claims there is a section in the
claims from which requires the insured to disclose details of other insurance policies that are
held by him in respect of the same subject matter.

The principle of proximate cause (Causa Proxima)

The principle of Proximate Cause (Causa Proxima) requires that the loss for which claims are to
be made must have been caused by an insured peril. There has to be no intervention from a new
independent source. Proximate cause is the cause that immediately and directly precedes the
effect.

Illustration

If a house is insured against fire peril, the loss for which claim is being made must have been
caused by fire and not any other even. If a house that is insured against fire risk collapses or is
destroyed by flood the insured cannot claim under fire policy because the destruction of the
house was caused by flood and not fire.

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However, Proximate cause should be distinguished from remote cause. Remote Cause on the
other refers to some distant or not immediate cause or some events coming between, that is,
intervening between the cause and effects. Examples, goods in a shop are insured under fire
policy. There was a fire outbreak in the shop but it did not affect the goods. But the windows
were destroyed. Thieves took advantage of the destroyed windows, went in and stole the goods.
In this case, the immediate cause of the loss is theft and not fire. Fire is the remote cause. Hence,

the application of the maxim which states that ‘Causa Proxima Non Remota Spectatur’. This

means that it is the immediate cause and not the remote cause that it is the immediate cause and
not the remote cause that is considered.

Application of the Principle of Proximate Cause

If a loss is caused by a single event, the proximate cause would be easy to determine. But if the
loss is caused by a series of event, the determination of the one that caused the loss could be
difficult. However, some rules have been evolved over the years which are used as guidelines in
determining the proximate cause of a loss.
These are:
(a) Single Cause: If there is a single cause and the single cause is an insured peril, then
the proximate cause of the loss is an insured peril and the insurers would be liable.
(b) Excepted Peril: Where a loss is caused by an insured peril, and an excepted peril, and
it is not possible to separate the two, the insurers would not be liable. An excepted
peril is one that is specifically excluded in the terms of the contract, example;
damages or losses caused as a result of strikes or riots.
(c) Separate Insured from excepted Peril: If the loss caused by the insured peril can be
separated from that caused by the excepted peril, the insurers would pay the portion
that is traceable to the insured peril.
(d) Intervention of Insured Peril: Where an excepted peril precedes an insured peril, it
means that the insured peril stared a new cause from the point of its intervention and
therefore the insurers are liable from the point of intervention.

Hurricane started Hurricane forced Fire started and

(An excepted peril) candlelight to fall on a burns building
stack of newspaper (insurers liable)

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 From the above example, hurricane is an excepted peril in a fire policy. It started and
forced a candle light to fall on a stack of newspapers. Fire started from there and the
building insured under fire policy was burnt down. The insurers would be liable to
pay the loss.
Concurrent Causes: If there are several and concurrent causes, provided one of the
causes is an insured peril, the loss is payable by the insurer. This point is supported in
a decided case Etherington Vs The Lancashire and Yorkshire Accident Insurance Coy
(1909) in Great Britain. In this case, the decease took an accident policy. The policy
covered the deceased against death or disability arising from accident. The deceased
went hunting and fell from his horse into ditch and sustained some injuries. After the
fall, there was no rescue and he was exposed for a long time to rain and cold. He
caught pneumonia and died from it.
The dependent (Mr. E) of the deceased sought to claim from the insurers on the
ground that the deceased died as a result of the injuries sustained from an accidental
fall. The insurers refused to pay on the ground that the proximate cause of the death
was sickness (pneumonia) and that the injury sustained from the fall was only a
remote cause. The court held that the insurers had to pay because the accident and the
pneumonia are concurrent causes and that the accident was the proximate cause.
(e) Natural Result: An insured peril cannot be the proximate cause where there is
interruption in the claim of events such that the intervening events which directly
produced the loss is not the direct and natural result of the insured peril.

Proximate Cause and Marine Insurance

The Marine Insurance Act, 1961, is the only insurance legislation so far that dealt with the issue
of proximate cause. The Act states that an insurer would be liable for a loss that is proximately
caused by an insured marine peril. The Act in section 56 listed excluded perils as follows:
(i) That the insurer shall not be liable for any loss that is not proximately caused by an
insured peril.
(ii) That the insurer shall be liable for any loss proximately caused by an insured peril
even though the loss would not have happened but for the misconduct or negligence
of the master and crew.

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(iii) The insurer of the ship or goods shall not be liable for any loss proximately caused by
delay.
(iv) The insurer shall not be liable for ordinary wear and tear, ordinary leakage or
leakages, inherent vice or nature of the subject- matter insured or any loss
proximately caused by rats or vermins or for any injury to machinery not proximately
caused by maritime perils.

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