The Indemnity Principle Flashcards
What is the indemnity principle?
The insured must prove not only the occurrence of the insured peril (for example, fire) but also that he has suffered in consequence a pecuniary loss, over and above any excess (or “retention”) which he has agreed to bear himself - this is the indemnity principle.
“The contract of insurance contained in a marine or fire policy is a contract of indemnity, and of indemnity only, and that this contract means that the assured, in case of a loss against which the policy has been made, shall be fully indemnified, but shall never be more than fully indemnified”. [Castellain v Preston].
What is the “sum insured”?
The “sum insured” represents the maximum figure which the insured can recover.
Chapman v Pole [1870] 22 LT 306 Cockburn CJ:
⁃ “You must not run away with the notion that a policy of insurance entitles a man to recover according to the amount represented as insured[ So if something is insured up to the value of £1million and it is destroyed, this does not entitle the insured to £1million - they can only recover the real and actual value of the goods.] … He can only recover the real and actual value of the goods”.
Over-insurance will do the policyholder no good. Where the insured item is damaged (a partial loss) the insurer is required to pay for the cost of its repair to its pre-damaged condition. Where repairs are not carried out the standard measure of indemnity is the second hand value of the object in its pre damaged condition. It is possible to insure for “replacement as new”, but that will cost more.
What are the exceptions to the indemnity principle?
There are some exceptions to the indemnity principle:
⁃ (1) contingency insurance (such as life assurance or personal accident insurance)[ So the indemnity principle DOES NOT APPLY TO THESE INSURANCE CONTRACTS. E.g. in life assurance is someone dies then you don’t have to prove your loss: a certain amount will be paid out.] or
⁃ (2) a “valued” policy where a fixed amount will be paid.[ Again, the indemnity principle does not apply to these insurance policies - rather an agreed sum is payable on the total loss of the subject of the insurance at an agreed sum.
Quite often valued policies will be in place in marine insurance since it is often difficult to determine at a particular point in time what a ship is worth.
Valued policies are also used in areas like fine art.
Outside of these areas, valued policies are quite rare.]
What is the difference between England and Scotland in relation to indemnity principles?
In England (but not in Scotland) under the Fires Prevention (Metropolis) Act 1774 the insurer is obliged to pay for the reinstatement of the property up to the value of the sum insured at the request of any person having an interest in a building that has been damaged or destroyed by fire.
What happens if an insured insured the same risk with two companies?
The insured cannot make double recovery if he insures the same risk with two insurers - he can pursue his claim against one of the insurers only in order to recover his loss and the insurer who had paid out would be entitled to recover a contribution from the other (except where the contract of insurance includes a “rateable contribution clause”.)
What is a “rateable contribution clause”?
If you have a rateable contribution clause then this means that each insurer is only liable to contribute rateably - the insured will have to seek payment from each of the insurers for a pro rata share.
Does the indemnity principle apply to life assurance?
In life assurance you can insure your own life for whatever sum you wish and there are no issues with double insurance[ This is because the indemnity principle does not apply.]. However it is not permissible to insure the life of another person for a value beyond what you will lose if they die: Life Assurance Act 1774, section 3.
Leppard v Excess Insurance Co Ltd [1979]
The following is a case in which the indemnity principle can be seen:
⁃ Claimant purchased a dilapidated cottage as an investment for £1500 for the express purpose of reselling it.
- It was insured for its full value[ the amount which it would cost to replace the property in its existing form should it be totally destroyed] (£10,000) - this was the sum representing the full value (i.e. the sum it would cost to replace the property if it was destroyed). The claimant then increased the insurance to £14,000 and the property was completely destroyed by fire.
- The claimant made a claim against the insurer for the rebuilding cost - it was agreed that it would cost £8000 to rebuild but the insurer only offered £3000 since this was the agreed market value of the property and the land on which it stood (and it was the price at which the insured was willing to sell prior to the fire.) The court upheld the insurer’s position on the ground that anything over £3000 would have effectively been a profit for the insured and this was forbidden by the indemnity principle: he had only lost the £3000 that he would have sold it for.
What is the difference between making in a claim in indemnity between Scotland and England?
Under English law, the right to indemnity (the right to be paid out in terms of the policy) is in legal terms the equivalent to a claim for unliquidated damages for breach of contract[ E.g. the happening of a fire to an insured building is equal in law to a breach of the insurance contract.] - it arises at the time of the loss event and not at the time when the insured makes a claim or the insurer wrongfully refuses to pay. Therefore, the indemnity principle extends to denying the insured any ability to claim damages from the insurer for consequential losses flowing from the insurer’s failure promptly to pay a valid loss.
This is not the position in Scots law. In Scots law, where the insurer is liable to indemnify the insured, the payment of the insured’s claim made under the policy is classified as a contractual obligation to pay a sum of money equivalent to the insured’s loss, rather than an obligation to pay damages for breach of contract or otherwise: Scott Lithgow Ltd. v Secretary of State for Defence 1989 and Strachan v Scottish Boatowners’ Mutual Insurance Association 2010.
⁃ This means that in Scotland if the insurer unduly delays in making a payment then the Scots courts will allow a damages claim for late payment since the insurer is considered to be in breach of its contractual obligation to pay (thus Sprung would have been decided differently in Scotland).
⁃ So the insurer could be liable for other losses which the insured has suffered due to their breach of contract in failing to pay out in an appropriate period of time, provided it satisfies the general remoteness criteria for contract from Hadley v Baxendale. However, the test for foreseeable loss has been interpreted quite restrictively.
Sprung v Royal Insurance (UK) [1999]
[English take on indemnity]
⁃ The insurer handled a claim following a break in, theft and vandalism very badly. The insurer eventually allowed a judgment to be passed against them but it was for a much smaller amount than the original claim. This happened four years after the loss. The claimant wanted damages (consequential) for the financial consequences of the insurance company’s failure to deal with the claim promptly and fairly. The court followed earlier authority and held that the indemnity principle is of the same nature as a payment of damages for breach of contract and there is no cause of action for the late payment of damage other than the court adding interest to the sum payable; therefore it is not possible to claim for consequential damages.
What is subrogation?
Subrogation is the right of an insurer who has fully indemnified the insured to stand in the shoes of the insured and to exercise (in the name of the insured’s name) all rights that the insured could have exercised himself to recover from any source other than the insurers the whole or part of the financial loss he has sustained and for which he has been indemnified.
⁃ Example[ Car accident caused by A and B suffers a loss as a result of this accident. B claims on his motor insurance policy and is indemnified for that loss by his insurance company, C. C is then able to raise proceedings against A in delict to recover the sums which he has paid to B.]
What is the general rule of subrogation?
The general rule is that the insured must never be more than fully indemnified. From the indemnity principle flows the right of subrogation. The principal of subrogation does not arise in cases of life insurance. It is often stated to involve two separate rules.
- The insured must never be more than fully indemnified. He cannot profit from his loss and any profit which he does make is payable to the insurer. [Castellain v Preston]
- Where the insurer has indemnified the insured, the insurer is entitled to all the insured’s rights against third parties in respect of the loss itself, and any sums that the insured may received which diminish the loss.
Castellain v Preston [1883]
The owner of property/insured contracted to sell it but the buildings on it were destroyed by fire before the sale was completed. The owner was insured and the insurers paid out the full amount of the cost of the damage, before the completion of the sale takes place. The purchaser then proceeds with the purchase and the seller gets the full purchase price for the property.
- Under this contract of sale, in terms of which ownership of the property is transferred from the insured to the purchaser. The insured vendor was not accountable to the purchaser for the insurance proceeds (which means he has received the indemnity and also the purchase price. The insurers sue the insured vendor for a sum equal to what they paid out to him on the basis that he has suffered no loss. The question for the court was whether the insurance company were surrogated to the insured vendor’s right to receive the full purchase price.
- It was held that they were subrogated so that they could recover the money that they had paid out.
- [The insured was entitled to recover the full value of the house from the purchaser, even though the house had been destroyed. It was held that he could not also recover the value of the house from the insurer because this would overcompensate him. The loss is calculated at the time of the loss.]
- This relates more to indemnity principle of insurance.
Lonsdale & Thompson v Black Arrow Group [1993]
If the insured is accountable to someone else, to do something with the proceeds of the insurance (usually in relation to reinstatement of the property) then insurers pay out and they don’t get a subrogated claim for the purchase price.
Caledonia North Sea v London Bridge Engineering 2000
Made clear that when the insurance company is subrogated to the rights of the insured (e.g. so they’ve paid out and are looking to raise proceedings against someone else) they have to raise the action in the name of the insured (payment out by the insurer to the insured under the policy does not have the effect of transferring the insured’s rights to the insurer). Since the insurer has paid out to the insured, the law gives the insurance company the right to insist that the insured authorises the use of his name in proceedings against others.
