Principles of Insurance Law

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UNIVERSITY OF THE WITWATERSRAND
SCHOOL OF ECONOMIC AND BUSINESS SCIENCES
BUSE221-INSURANCE AND RISK MANAGEMENT IIA
COURSE NOTES

GENERAL PRINCIPLES OF INSURANCE LAW

Apart from the principles governing all contracts insurance is also governed by its own unique principles.

INDEMNITY

• Is perhaps the most fundamental principle of insurance law. Object of indemnity is to place the insured after the loss in the same position he occupied immediately before the loss. He is not to be placed in a better or worse position. • Not all insurance contracts are contracts of indemnity e.g. life insurance. Indemnity is important as it deals in part with moral hazard. • Indemnity does not imply that the insured will be indemnified to the full value of his loss e.g. a person whose factory is destroyed by fire cannot recover for loss of profits or against any liability that may arise from the fire unless he has appropriate policies in place specifically designed to deal with these losses. • Indemnity can be achieved through the following methods: 1. Cash

2. Reinstatement e.g. where a building is destroyed, insurers may reinstate it. 3. Repair e.g. where a motor vehicle is partially damaged. 4. Replacement-instead of paying cash a replacement item may be tendered. 5.New for old-used for household contents. This is not a violation of the principle of indemnity as there is no principle of law that requires indemnity to be determined in terms of the market value of the asset. 6.Valued policies-in terms of which the insurer and the insured agree before hand on the value to be paid should a particular asset be destroyed or stolen. This method of indemnity is used for assets with a sentimental rather than a commercial value e.g. jewellery, works of art etc. • The principle of indemnity is supported by 2 corollaries namely-subrogation and contribution.

SUBROGATION
• Literally means “to stand in place of”. It is the right of one person to stand at law in the place of another and to avail him of all rights and remedies of that other person. • Often when a claim occurs there may be 2 avenues of recovery. Suppose A drives negligently and causes an accident damaging B’s car. If B’s car is insured 2 options are open to him to recover his loss-he can sue A in delict • for damages or he can claim from his insurer. If B pursues both avenues he will receive double compensation. • To prevent B from profiting from his loss subrogation is used in terms of which once the insurer has paid B the insurer assumes all B’s rights to sue A. This ensures that the principle of indemnity is preserved. • Subrogation has a number of sub-principles namely:

• The insurer cannot be subrogated to the insured’s right of action until it has paid the insured and made good the loss. • The insurer can be subrogated only to actions which the insured would have brought himself. • The insurer must not prejudice the insurer’s right of subrogation. Thus the insured may not compromise or renounce any right of action he has against the 3rd party if by doing so he could diminish his loss. • Subrogation against the insurer. Just as insured cannot profit from his loss the insurer may not make a profit from the subrogation rights. The insurer is only entitled to recover the exact amount they paid as indemnity nothing more. If they recover more the balance should be given to the insured. • Subrogation gives the insurer the right of salvage.

CONTRIBUTION

• Is another principle that aids indemnity. Often a person has more than one policy on the same asset. Following a loss the position of the 2 policies is governed by the principle of contribution. Since indemnity forbids the insured from recovering more than the loss then he cannot recover the full value of the loss from each of the 2 policies. • NB the law does not forbid people from engaging in double...
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