Definition and Enforceability of Insurance Contracts under Insurance Law

In the present case, Pacey had entered into an agreement with Shark Underwriters where the parties have agreed that in return of a premium paid by Pacey, Shark Underwriters will provide policy benefits in cases of any loss/damage accruing to Pacey’s Cadilac motor vehicles. The premium was decided to be annually renewable. The terms of the agreement clearly lay down that the premium for the policy will be deducted monthly from Pacey’s bank account. It has been stated in the facts that Pacey forgets to transfer money to his bank account as a result of which the debit order is returned and therefore the premium is not paid on the agreed date. Subsequently, Pacey met with an accident and damaged the vehicle. The claim submitted to Shark Underwriter was rejected because Pacey had defaulted in paying the premium.

1. The agreement concluded between Pacey and Shark Underwriters is financial in nature and is governed by Insurance Law. The agreement entails a long term policy between the insured and the insurer. The insured is also the policy holder who pays an amount to the insurer who in turn of the money undertakes to give policy benefits to the insurer in cases of any damage or loss or injury. The agreement entered between the insured and the insurer is governed by Insurance law and the premium is the consideration paid for the contract. This is a valid contract in the eyes of law because the agreement is enforceable by law and entered between two parties with the premium being the consideration. The basic definition of insurance law was given in the case of Lake v Reinsurance Corporations Ltd. 1967 (3) 124 (W) 127H, where it was held that the agreement entered between the insurer and the insured is valid and enforceable in the court of law. The products that came about by the agreement are movable and immovable objects that can be secured and protected from any loss or damage by the policyholder by paying an amount either periodically or annually. The Financial Advisory and Intermediary Services Act, 2002 applies to all the financial service providers. The term “financial product” is defined in section 1 of the Act which includes foreign currencies and securities which are denominated investment instruments. The person providing the service has to register themselves as the “Financial Service Provider”. This Act aims to give financial assistance by the service providers to consumers of various financial products. Therefore, in the present case, Shark Underwriter is the service provider who is providing assistance to Pacey with respect to the vehicle in return of the premium. The Cadilac is the financial product which owes its legality to the agreement signed between the two parties in light of the Financial Advisory and Intermediary Services Act, 2002.

Premium Payment as Essential Component of Insurance Contract

2.  In terms of premium and policy agreed between the parties, it is an agreement enforceable by court where the two parties are the insured and the insurer. The premium paid by the insured is the consideration which makes the contract valid. In cases of insurance law, the premium paid as the consideration is considered the most important and indispensable part of the contract. The premium paid by the insured is an essential part of the contract and it is deemed to be a prerequisite before entering into a contract of this kind.

The pertinent issue in the present case is whether Pacey can sue Shark Underwriters for denying the claim stating that the premiums have not been paid on time. The contract in the present case is bilateral, that is, the insured shall make the payment either periodically or annually in return for any assistance by the policy holder in times of any damage or loss. Therefore, the premium paid by the insured serves as the reciprocal counter performance in respect of the performance of the policy holder. In the case of Steyn’s Estate v South African Mutual Life Assurance Society 1948 (1) SA 359, it was held that timely payment of premium should be considered a condition precedent to the continuance of the risk. That is, if proper emphasis is laid on the judgment, it can be said that for the fulfillment of a contract, the insured has to make punctual payment of the premium. The first thing to check in contracts concerning payment of payments is whether the payment of the premium was a condition precedent. In cases, where the payment of premium is a condition precedent, the payment is mandatory for the validity of the contract. In cases of “renewal premiums”, the payment of the premium is considered to be a continuance of the risk, but the dictum should be well mentioned in the contract.

In the present case, Pacey paid the premium monthly and mostly he forgets to transfer the money to his bank account, thereby delaying the process. Therefore, when the vehicle met with an accident, Shark Underwriters refused to entertain the claim stating that Pacey did not pay the premium on time. In a contract of this nature, late payment of the premium can be considered a breach of contract because punctual payment of premium is a condition precedent.

3. Based on assumption that Shark Underwriters paid out Pacey’s claim in full and that Pacey also had a valid policy with the Whales Underwriters for the same benefit. The benefit is related to the risk of damage of the same Cadilac. Shark Underwriters is different from Whales Underwriters and they function independent of each other. In this case, the principle of co-insurers in an insurance law and the concept of indemnification by two insurers apply. Applying the judgment of Lord Hoffman in Caledonia North Sea Limited v British Telecommunications plc (Scotland) and Others [2002] 1 AII ER (Comm.) 321 (HL), held that when  two or more persons have separately agreed to indemnify anyone against any risk which is similar in case of both the insurers, payment by one insurer discharges the other. This is based on the legal principle that, “whoever has one claim to indemnity is not entitled to be paid more than once. The logic behind this principle is that one payment discharges the liability of the other. In the case of Caledonia North Sea Ltd v London Bridge Engineering Co and Others [2000] Lloyd’s Rep IR 249 at 283 (2^nd col), it was held by Lord Coulsfield that a claim of subrogation by the co-insurer will be competent only if the co-insurer had taken primary responsibility of the debt. In the case of The Sickness and Accident Assurance Association v The General Accident Assurance Corporation Limited, it was held that in contracts of indemnity, when the insured has recovered for a particular loss under one policy, the insurer can recover from other underwriters who have insured related to the same interest against risk of a similar nature of a similar product by way of contribution. In such a situation, the rule of subrogation will not apply. In cases of losses of same nature, the law of subrogation cannot apply. Applying the law of The Sickness and Accident Assurance Association v The General Accident Assurance Corporation Limited, it can be said that the insurer can recover the amount from other underwriter who have insured in the same risk and the amount can be recovered by way of contribution. Therefore, in the present case, Shark Underwriters can claim from Whales Underwriters by way of contribution.

References

[2000] Lloyd’s Rep IR 249 at 283 (2^nd col)

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Caledonia North Sea Limited v British Telecommunications plc (Scotland) and Others [2002] 1 AII ER (Comm.) 321 (HL)

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Faúndez, Julio, ed. Good government and law: Legal and institutional reform in developing countries. Springer, 2016.

Lake v Reinsurance Corporations Ltd. 1967 (3) 124 (W) 127H

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Steyn’s Estate v South African Mutual Life Assurance Society 1948 (1) SA 359