For those who are insurers or who are insured, it is useful to have a backdrop of the terminology and the practice of insurance law.
The practice of insurance law may be divided under two heads:
- Contentious: Where the insurance matter is disputable, such as determining the validity of an insurance contract; and
- Non-contentious: Where the insurance matter does not involve any disputes, such as the signing of an insurance contract.
Insofar as contentious work is concerned, the applicability of the law relating to non-contentious insurance work may be equivalent to that in contentious insurance work.
For example, the requirement of an insurable interest within an insurance contract is relevant in both a case of a dispute over the validity of the insurance contract, and is relevant to parties who wish to enter into a contract at the negotiation stage.
Another example of the “dual applicability” of the law of insurance is where the insurance contract expressly provides against “double recovery of insurance”, or the recovery by the insured against two insurers in respect of the same loss by different insurance contracts.
The person who engages in non-contentious insurance work should also be well aware that this law.
For the purposes of this article which deals only with some aspects of contentious insurance work, such work shall be treated in two aspects
- Disputes between the insured and the insurer; and
- Disputes between the insurer and a third-party.
Disputes Between the Insured and the Insurer and a Third-Party
Where the insurer pays the insured and takes over the insured’s rights against a third-party
The starting point in insurance claims is invariably where there is a claim by the insured against the insurer when an insured event has occurred. Examples of insured events may be:
- Food poisoning which results in death (Life insurance claims).
- A car accident which results in damage to property (Property damage or Personal injury claims).
- The loss on the value of a portfolio of investments as a result of negligence on the part of a financial manager (Economic Loss claims).
Once the insured has lodged a claim against the insurer, the insurer will investigate whether the claim comes under the “risks” clause of the insurance policy to determine whether the event is one which the insurer needs to pay out under the insurance contract.
If one of the events stated in the “risks” clause has occurred, then the insurer must be liable for it under the insurance contract.
Other matters which may also be relevant for investigation are whether the insured has complied with all the conditions of the policy, including for example, whether the insurer has given the insurer timely notice of the occurrence of the event insured against, and whether the insured has paid the premiums.
Dealing specifically with issues on “risk”, that is, whether the occurrence or event insured against has in fact arisen, the insurer would usually need to seek relevant documentary evidence to prove to its satisfaction that the risk has occurred.
If there is sufficient doubt as to whether the risk has occurred, the insurer may dispute the insured’s claim on the policy and refuse to payout (all such claims hereinafter referred to as “policy claims”).
If there is no doubt that the risk has occurred, then the insurer would be contractually bound (apart from any other defences) to make the pay-out. It is in this scenario that the insurer, having paid out to the insured or to a third-party, is subrogated into the position of the insured. Subrogation is simply a situation when by law the insurer takes over the rights of the insured against any third-party.
The insurer shall be entitled at law to all rights the insured had as against any third-party. Alternatively, the insurer may refuse to pay any third-party’s claim against the insured.
The insurer will then, pursuant to a clause in the insurance contract, be entitled to defend the insured against the third-party’s claim. (all such claims hereinafter referred to as “third-party claims”, described below).
In relation to policy claims, a number of issues may arise, which may be related to the risk and have a bearing on the outcome on the resolution of the dispute.
For example, the insured is under a duty of utmost good faith to reveal any matters which might affect the insurer’s decision to undertake the risk. Hence, a person who is aware that he has a terminal condition must inform the insurer of the condition before entering into a life or medical expenses insurance contract.
Another example of an issue, which goes to the resolution of the question of risk, is the interpretation of the words which describe the risk. In other words, does the event fall within the definition of the risk which is provided for in the insurance contract?
Thus, with policy claims, it is quite often the case that expert evidence will be required to assist the court on the insurance market’s understanding and meaning of certain words in the risk clause.
However, as it is a matter of interpreting the legal effect of the words, the court has the ultimate decision on what the words mean at law.
The same considerations apply with respect to “peril clauses”. “Peril clauses” are clauses which specify the events which will not be insured against by the insurer. As a result, the insured will have to bear the loss if the “peril” occurs.
For example, an insurance contract may specify that the insurer will make good all losses suffered by way of property damage arising from water. The same insurance contract may state under “peril” that the insured must bear any loss which arises from a hurricane.
Therefore under this insurance contract, the insurer will pay out for all property damage losses suffered arising from water, but not for any loss due to the occurrence of a hurricane.
Third-party claims may involve more complex issues, usually of a liability arising from the relationship outside of the insurance contract. An example of this type of liability is such as a pedestrian and a driver of a vehicle on the road, where an accident occurs.
The question then arises, as it is said in “tort”, as to whether the driver is liable for the injury to the pedestrian (as the pedestrian is not a party to the insurance contract), and if to, to what extent.
To take another example, if A’s (the insured’s) motor car is damaged in an accident by a collision with B’s motor car, assuming that the A’s insurer has paid out on the repairs and A’s position has been “subrogated” to the insurer, then the dispute revolving on negligence arises between A and B.
A third example is where a third-party, C, sues a financial manager, A, for losses arising from alleged mismanagement of funds. The financial manager’s insurer having been subrogated to the position of the financial manager, the dispute is between A and C on the question of negligence.
The position of insurer, as the person who is either commencing the suit or being sued by another person, may be interchangeable. That in turn depends on the insurer’s assessment of the claim.
Hence in the case of the motor car accident stated above, the insurer would be claiming against B to recover its loss.
On the other hand, in the case of the alleged negligence of the financial manager, the insurer is defending the position of the financial manager pursuant to a clause in the insurance contract.
Should you require assistance on your insurance matter, please do not hesitate to contact me.
This article is not intended to be and nor should it be relied upon as legal advice, and the author assumes no responsibility for the accuracy or completeness of the contents.