Produced by: The Chartered Insurance Institute 20 Aldermanbury London EC2V 7HY 020-8989-8464

P05EG (APRIL 2005)

EXAMINATION GUIDE

P05 – INSURANCE LAW

This guide is intended for candidates preparing for the examination unit to which it relates. Candidates will find the guide most helpful if used in conjunction with the self-assessment exercises in the coursebook. The answers presented in the guide provide an outline of the key points which candidates could beneficially have covered in the examination. They are not necessarily a definitive statement of some unique, correct answer and, where applicable, other appropriate views could also gain good marks. The guide should provide greater insight of the approach the examiners were looking for. Practice in answering the questions is highly desirable and should be considered a critical part of a properly planned programme of examination preparation.

2 P05EG

P05EG 3

P05

THE CHARTERED INSURANCE INSTITUTE

DIPLOMA

APRIL 2005 EXAMINATION PAPER

UNIT P05 INSURANCE LAW

Three hours are allowed for this paper, which is in two parts.

READ THE INSTRUCTIONS OVERLEAF CAREFULLY BEFORE ANSWERING ANY QUESTIONS.

4 P05EG

P05EG 5

THE CHARTERED INSURANCE INSTITUTE

P05 – Insurance law

CANDIDATE INSTRUCTIONS

READ THE INSTRUCTIONS BELOW BEFORE ANSWERING ANY QUESTIONS

Three hours are allowed for this paper. You should answer all questions in Part I and two out of the four questions in Part II. The paper carries a total of 200 marks, as follows: Part I 140 marks Part II 60 marks You are advised to spend no more than two hours on Part I. You are strongly advised to attempt ALL the required questions to gain maximum possible marks. In attempting the questions, you may find it helpful in some places to make rough notes in the answer booklet. If you do this, you must cross through these notes before you hand in the booklet. Answer each question on a new page. If a question has more than one part, leave several lines blank after each part. • Fill in the information requested on the answer booklet and on form B.

• You are allowed to write on the inside pages of this question paper but you must NOT write your name, candidate number, PIN or any other identification ANYWHERE on this question paper.

• The answer booklet and this question paper MUST BE HANDED IN PERSONALLY BY YOU to the invigilator before you leave the examination. FAILURE TO COMPLY WITH THIS REGULATION MAY RESULT IN YOUR PAPER NOT BEING MARKED AND YOU MAY BE PREVENTED FROM ENTERING THIS EXAMINATION IN FUTURE.

THE CHARTERED INSURANCE INSTITUTE © The Examinations Department, CII, 20 Aldermanbury, London EC2V 7HY

6 P05EG

PART I

Answer ALL questions in Part I. Each question is worth 10 marks.

Note form is acceptable where this conveys all the necessary information.

1. William steals Harry’s car, sells it and spends the money. He is convicted of theft in

the Crown Court. (a) If William appeals, which court will hear the case? (2 marks) (b) If William loses his appeal, what further rights of appeal does he have, if

any? (3 marks) (c) If Harry sues William in a civil case for the loss of his car, what tort will he

allege? (2 marks) (d) What court will hear the civil case? (3 marks) 2. Anne writes to Emily making a firm offer to sell her motor cycle but stipulates that

Emily must accept ‘by return of post’ if she wants to have it. Two hours later Anne receives an e-mail from Emily saying that she accepts the offer but Anne has in the meantime decided not to sell the motor cycle.

Is there a binding contract between the two? Give a reason for your answer. 3. (a) What is the purpose of the Pre-Action Protocols that were introduced into the

civil justice system under the ‘Woolf’ reforms? (4 marks) (b) Briefly outline the main provisions of the Pre-Action Protocol for personal

injury cases. (6 marks)

P05EG 7

4. Veronica is employed as a junior clerk by Adhesive Insurance Brokers. Her contract

of employment states that if she leaves Adhesive she must not work for any insurance firm within ten miles of Adhesive’s offices for the next three years. Veronica has been offered a job at a higher salary with another broker, Attractive Insurance Agencies, whose offices are one mile away. She wants to take the job but is worried about being sued by Adhesive.

(a) Advise Veronica as to her legal rights and duties. (5 marks) (b) How would your advice differ, if at all, if Veronica was a senior executive at

Adhesive? (5 marks) In each, cite a case to support your advice. 5. Explain and distinguish between strict liability and vicarious liability. Give an

example of each. 6. Ronald is given a quotation over the telephone by David, a ‘telesales’ person

employed by Homephone Insurance. David tells him that Homephone is ‘the best insurer in the UK’ and that a Homephone policy ‘could save him up to 50%’. Ronald accepts the Homephone quotation of £360 but learns a month later that Homephone came last in a recent survey of insurers’ service standards. He also finds that a policy with Inexpensive Insurance would cost him only £250. Ronald tells Homephone that he wishes to withdraw from the contract and have his money back. However, they refuse his request, saying that now the risk has started to run he cannot withdraw or recover any part of his premium. Advise Ronald as to the legal position, explaining the legal principles involved.

7. In the context of claims for personal injury, distinguish between special damages and

general damages. Give an example of each. 8. Distinguish between a joint insurance and a composite insurance. In what

circumstances is this distinction likely to be important, and why?

8 P05EG

9. Outline five circumstances in which someone other than the person who originally

entered into the contract with the insurer may be able to claim on the policy in their own name.

10. Outline two circumstances in which an insurance agent is likely to be acting as agent

to the insured (or proposer) and two circumstances in which an intermediary is likely to be acting as agent of the insurer.

11. Using life insurance as an example, distinguish between a legal assignment and an

equitable assignment. What are the advantages to the assignee of taking a legal rather than an equitable assignment?

12. Outline the principle(s) of law illustrated by ONE of the following cases: (a) Macaura v Northern Assurance Co. Limited (1925); (b) Lucena v Craufurd (1806). 13. What is a corporation sole, and how can it be created? Give two examples of

corporations sole. 14. (a) What are the effects of illegality on a contract? (7 marks) (b) Give two circumstances in which an insurance contract might be illegal.

(3 marks)

P05EG 9

PART II

Answer TWO of the following FOUR questions. Each question is worth 30 marks.

15. What are the main types of fact or information that a proposer for insurance need not disclose, even though they may be material to the risk? Where appropriate, use case law to illustrate your answer.

16. The operative clause of most property insurance contracts allows the insurers to

settle a claim by reinstating (i.e. actually reconstructing) a damaged building instead of paying money. However, insurers rarely exercise this option. Explain why this is so, using case law to illustrate the problems that might arise if an insurer does choose to reinstate.

17. Explain the main circumstances in which: (a) insurers may agree to waive (give up) their rights of subrogation; (13 marks) (b) the law may prevent insurers from exercising any right of subrogation.

(17 marks) 18. Arthur farms land bordering a river. After a period of exceptionally heavy rain the

river level is dangerously high and the river is threatening to burst its banks and flood Arthur’s land, where valuable crops are just about to mature. Arthur brings in a firm of contractors who use heavy machinery to raise the river bank and prevent the flooding. He then sends a bill of £10,000 to his insurers, based on the sum of £9,000 which he had to pay the contractors to do the work and £1,000 in respect of damage to crops that was the inevitable result of the work. He points out that his insurance policy covers flood and, if he had not had the work done, flood damage to his crops in excess of £10,000 would almost certainly have occurred. Discuss the liability of the insurers for this claim, citing relevant case law.

10 P05EG

P05

SUGGESTED SOLUTIONS The answers set out below show the approach being looked for by the examiners. In many cases there is scope for well-reasoned alternative views which would also receive good marks.

EXAMINER’S COMMENTS This was the first sitting for the Subject PO5 and the general standard of the papers was quite good, with some papers of a very high standard indeed. The Part 1 questions (1-14, for each of which 10 marks was available) did not appear to present any serious difficulties, at least for candidates who had prepared thoroughly for the examination. The answers to the Part 2 questions (15-18) were less satisfactory. First, it should be noted that these questions carry 30 marks each, which implies that the answers should have greater depth, and be longer and more detailed than those for Part 1. Many candidates appeared not to appreciate this, and often produced answers that were no more detailed (and sometimes actually shorter!) than the Part 1 answers. The answers to question 16 were often poor, largely because many candidates confused the concept of reinstatement as a method of providing indemnity (i.e. the settling of claims by actually rebuilding instead of paying money) with cover on a reinstatement basis (i.e. ‘new for old’ cover provided under the terms of a Reinstatement Memorandum). The question involved the former, not the latter. Finally, the answers to question 18 were often rather weak, with vague arguments and little reference to appropriate case law. Questions such as this, which involve the application of knowledge to a particular problem or situation, can sometimes look more demanding than ‘bookwork’ questions. However, candidates who can analyse the problem or situation successfully are often rewarded with very high marks.

P05EG 11

Question 1 (a) Court of Appeal, Criminal Division. (b) House of Lords, but only with leave and on a point of law. (c) Conversion (a form of trespass to goods). (d) County Court or High Court, depending on the value of the car and amount of the

claim. Question 2 Generally an offer can be made in any form and accepted in any form. However, if the offeror stipulates that acceptance must be made in a particular form then either that form must be used, or a form that is equally efficacious from the offeror’s point of view, if a valid contract is to be concluded. In this case Anne states that she requires an acceptance by return of post, which implies an immediate written reply by post. However, an email would seem to be just as effective so there is probably a good contract in this case. Question 3 (a) Under the Woolf reforms Pre-Action Protocols are being issued for different types of

claim. Their function is to facilitate negotiation and enable the parties, if possible, avoid court action altogether.

These protocols are essentially lists of things that the parties are expected do before

they start any legal action. (b) The Pre-Action Protocol for Personal Injury cases is particularly important for

insurers because many liability insurance claims are for bodily injury. Amongst many other things, this Protocol requires that:

• the claimant should send the defendant (and insurers if known) a letter of claim

promptly once they have enough information to support their claim; • the defendant should respond (identifying their insurer) within 21 days; • the defendant (usually, in effect, the insurer) should investigate the claim and

respond within three months, either admitting liability or, if it is denied, giving reasons for denial and enclosing the relevant documentation;

• the parties should co-operate in appointing any expert witnesses that are required and should try to agree to use one expert.

12 P05EG

Question 4 (a) Restraints of this kind are usually deemed to be against public policy, especially

where the effect is to prevent the employee from earning her living through the use of some general skill or knowledge which she has acquired. On this basis the clause in Veronica’s contract may well be void.

For example, in Attwood v Lamont (1920), a tailor and draper at Kidderminster

employed the defendant under a contract stating that Lamont could not, on leaving his employment, carry on a business as a tailor within 10 miles of Kidderminster. It was held that this restriction was merely to prevent the defendant from using his skill in competition with the claimant and was therefore void.

(b) The courts are more willing to allow the employer to protect himself from the misuse

by the employee of trade secrets, confidential information and lists of customers and trade connections. On this basis the clause in Veronica’s contract might well be valid is she was a senior executive.

For example in Forster & Sons v Suggett (1918), where the works manager of a glass-

making company had agreed not to work for a rival firm for five years after leaving his present job, the restraint was held to be valid because the manager knew of a secret manufacturing process which would be valuable to a rival.

Question 5 Strict liability is liability that can arise even in the absence of intent or negligence on the part of the defendant. Examples include the Rylands rule in tort together with a variety of statutory liabilities and liability in contract generally. Vicarious liability is liability assumed by one person for the tort (or sometimes criminal act) of another. Vicarious liability in tort is joint. The main example is the vicarious liability of an employer for a tort committed by an employee in the course of his employment.

P05EG 13

Question 6 The issue here is the duty of good faith and, specifically, misrepresentation. The duty of good faith rests on both parties and in this case the insurers, though their employee, may be guilty of misrepresentation (see Kettlewell v Refuge (1908)). However, a misrepresentation is only actionable by the other party if it is a misrepresentation of fact rather than opinion, and both the statements made by David would seem to fall in the latter category. On this basis Ronald cannot avoid the contract for misrepresentation. It is true that, at common law, no return on premium is payable once the risk has started to run. However, most policies have a cancellation clause allowing a partial return in such a case, so we would need to know the terms of the contract in order to say whether a return of premium should be given. Question 7 Special damages are those of which the claimant is required to give notice when he makes his claim against the defendant and which he must prove strictly at trial. The term is also used to describe damages that are capable of precise financial assessment. Examples (arising, say, from injuries received in a car accident) might include (past) loss of earnings, damage to clothing and medical expenses. General damages do not require such strict pleading and proof, because they relate to losses which the law automatically presumes to result from the tort and which cannot be precisely quantified but only assessed on the basis of what a ‘reasonable man’ would deem appropriate to compensate for the loss. For example, pain and suffering following an injury. Question 8 Under English law the distinction between a joint and composite insurance hinges on the interests of the insured persons. If two or more insured persons share a common interest in the subject matter, for example where they are joint owners of property, the policy is likely to be joint. On the other hand, where the interests are different, as in the case of lessor and lessee, or mortgagor and mortgagee, the policy is likely to be composite. A joint policy is ‘indivisible’, so that a breach by one insured (such a breach of good faith) may cause the whole policy to fail. By contrast, a breach or default by one insured under a composite policy may invalidate their own cover without affecting the right of other insured persons to claim, provided they the latter are innocent of the breach or default. A composite policy can thus be viewed as a bundle of separate contracts between the insurers and the various insured persons, but contained in a single policy.

14 P05EG

This distinction becomes particularly significant where there has been fraud, a breach of good faith or breach of warranty by one (or more) co-insureds but not by others. Another situation where the distinction may be important is where the loss has been brought about by the ‘wilful misconduct’ of the insured or where payment of the claim might be against public policy. If the property in question is jointly owned, and the insurance is joint (which is likely to be the case), an ‘innocent’ co-insured could find that they have no cover. Question 9 Under the Contracts (Rights of Third Parties Act 1999, someone other than one of the original contracting parties) can enforce a contractual term if: • the contract provides that they may do so; or • the contract purports to confer a benefit on the third party. An insurance contract, or the benefit of a contract, can be assigned to a third party. If there is a legal assignment the assignee can enforce the contract in their own name. A third party can gain the right to claim on an insurance policy under the rules of agency. The most straightforward situation is where a third party authorises the policyholder to insure on their behalf. Sometimes a person who insures is deemed to have established a trust for the benefit of a third party, who can enforce the policy. This arises frequently in the field of life insurance where a person insures their own life, but does so expressly for the benefit of another. Section 148(7) of the Road Traffic Act 1988 effectively reverses the common law rule by allowing persons other than the policyholder (such as other persons who are permitted to drive the vehicle) to enforce the policy directly, although they were not parties to the original contract. Another exception to the doctrine of privity is found in section 151 of the 1988 Act. In effect, this allows the victim of a road accident to make a direct claim against the motor insurer of the negligent driver who caused the accident. Under the Third Parties (Rights Against Insurers) Act 1930 an accident victim can, in cases of insolvency on the part of the insured, bring an action once liability is established directly against the liability insurers, thus bypassing the insured and the insured’s other creditors.

P05EG 15

Question 10 When an agent advises the proposer about the sort of insurance he needs and recommends a general type of policy the agent is clearly acting on behalf of the proposer, who is therefore the principal at this point. The agent will also be deemed to be acting on behalf of the insured in advising the latter on the formulation of a claim. On the other hand, insurance intermediaries who are empowered by insurers to grant cover (particularly common in the case of ‘personal lines’ business such as motor and household) will obviously be acting on behalf of the insurer when doing so. This will be the case where the agent has actual authority to grant cover or where he has apparent authority only. An agent may also be acting on behalf of the insurer when he collects insurance premiums for the latter. Question 11 A legal assignment, generally, is a formal assignment that is required to be in writing and with notice given to the party who is liable under the contract. There can be a legal assignment of a life insurance policy in conformity with s.136 of the Law of Property Act 1925, or under the Policies of Assurance Act 1867. The latter act indicates the form of words which must be used for the assignment, requires these words to be endorsed on the policy or contained in a separate instrument, and requires that written notice of the assignment be given to the insurer at its principal place of business. An equitable assignment is an informal assignment which can be in any form provided the intention to assign is clear, for example by simply handing a life policy to another with words that clearly indicate such an intention. The key advantage of a legal assignment is that an assignee can enforce the policy in his own name whereas, in the case of an equitable assignment, the assignee can only enforce the contract by joining the assignor in the action, either as co-claimant or co-defendant. Question 12 (a) Macaura In England, for an insurable interest to be valid in law it must be a legal (or equitable)

interest, that is, one that the law recognises and will support. A financial interest alone is not sufficient.

16 P05EG

In Macaura v Northern Assurance Co Limited (1925) Macaura had insured a quantity of timber on his estate under a fire policy in his own name. He had already sold the timber to a company of which he was the only shareholder. When the timber was destroyed in a fire the insurers refused to meet the claim on the grounds that Macaura had no insurable interest in the assets of the company. The House of Lords supported the insurers, holding that the insured had an interest in his shares, but none in the timber, which was owned by the company, a separate legal entity.

The fact that the insured would clearly suffer an economic loss as result of the fire,

because the value of his shares would go down, was regarded as insufficient to give him an insurable interest.

It is worth noting that in a number of countries where the legal system is based on

English law the Macaura principle has been rejected, abandoned, or never adopted. They include the USA, Australia and Canada. Generally, in these countries an economic or financial interest in the subject matter is required but a legal or equitable interest is not.

(b) Lucena v Craufurd (1806) English law requires that a person should have a current (or present) insurable interest

in the subject matter of insurance at the relevant time. A mere hope or expectation of acquiring an interest in the future is not enough, even though there is a moral certainty of doing so.

The leading case is Lucena v Craufurd (1806). Here the Crown Commissioners

insured a number of enemy ships which had been captured in the Napoleonic wars when they were still on the high seas. The authority of the Commissioners to take charge of the ships began only when the vessels reached port and they sank before doing so. In marine insurance insurable interest is required at the time of the loss and the Commissioners only had an expectation at this point, so they could not recover.

P05EG 17

Question 13 A corporation sole is a legal person representing an official position which will be occupied by a succession of different people. Such corporations are legal entities that are quite distinct from the people who actually hold the positions at any given time and who merely act on behalf of the corporation. The Queen in her public capacity is a corporation sole. Other examples include the bishops and parish priests of the Church of England and the Public Trustee. For example, a bishop is a particular named human being with his own personal rights and property. However, at the same time he holds an official position as Bishop of his Diocese and it is in this capacity that he fulfils his official duties and holds certain Church property. When a bishop dies he ceases to exist as a natural legal person but the office of bishop remains. The corporation cannot die, and regardless of when the new bishop assumes office (which may not be immediately) there is no break in its powers and its property remains vested in it. Corporations sole can only be created by statute. Question 14 (a) An illegal contract is generally void, and the court will not assist a party to the

agreement in any way. The contract therefore cannot be enforced and, furthermore, money or goods delivered under it cannot usually be recovered by an action in court.

Where money or goods have changed hands under an illegal contract, the defendant is

therefore in a stronger position than the claimant who seeks the aid of the court to recover it, since the help of the court will be denied once the illegality of the agreement is discovered. This is expressed in the legal maxim in pari delicto potior est defendentis (‘where there is equal wrongdoing the position of the defendant is stronger’). However, there are some exceptions to this rule, when it may be possible for the claimant to recover property transferred under an illegal contract.

Finally, if a contract is illegal in part only, the court may in some cases be willing to

enforce the valid portion of the contract and refuse assistance only with regard to the illegal part. This is called ‘severance’.

(b) Examples of illegal insurance contracts include: • those where there is no insurable interest required by the Life Assurance Act 1774; • those where purpose of the insurance contract is illegal; • those where there is unlawful use of insured property; • those where there is a close connection between the insurance and a crime.

18 P05EG

Question 15 Some things need not be disclosed, even if they are material. They include the following: Matters of law. Everyone is deemed to know the law. There is no requirement to disclose factors that reduce the risk – i.e. make it better than a normal risk of its type. Examples include the installation of an alarm system for a theft risk or automatic sprinklers for a fire risk. In some cases the need to disclose information is made superfluous by reason of the terms of policy. For example, if a personal accident policy excludes injury arising from participation in winter sports the proposer would not be obliged to disclose the fact that he went skiing regularly, unless specifically asked to do so. Similarly, there is no need to disclose matters, however material, which are the subject of an express or implied warranty in the policy. There is no duty to tell insurers things that they already know. The information does not have to come from the proposer. In fact, it does not seem to matter where the information came from, provided the source is reliable. See, for example Woolcott v. Excess Insurance Co. Ltd. (1979). Facts which the insurers ought to know. In some cases the courts take the view that, whilst the insurers might not have actual knowledge of the circumstances they have ‘constructive knowledge’, that is, they ought to know of them. This category covers a number of situations, including the following: • Facts which are notorious (i.e. matters of common knowledge). An insurer is deemed to

know about things that are in the public domain. See for example, Carter v. Boehm (1766).

• Facts about the trade the underwriters insure. Insurers are deemed to be aware of the normal trade practices in the businesses they insure and the usual risks associates with them. However, this does not necessarily extend to events that have affected the trade in question, even if they are quite recent. See for example, Bates v. Hewitt (1867).

Information that is waived by the insurers. This covers a number of situations, including the following: • Facts about which the insurers have been ‘put on enquiry’. Where insurers have been ‘put

on inquiry’ about things that are material they may not be able to plead non-disclosure if they then fail to follow the matter up. The most common example is the proper who writes a phrase such as ‘see your records’ on the proposal form in answer to a question about their previous claims history.

• Facts that are outside the scope of specific questions. If an insurer asks a question of limited scope, by implication there is a waiver of related information that goes beyond the scope of the question. For example, if an insurer asks for details of all accidents or losses that have occurred in the last five years, there is no need to disclose accidents that occurred more than five years ago.

P05EG 19

• Facts which an inspection of the risk should have revealed. If the insurer carries out a

survey or inspection of the risk there is no duty to disclose facts that should have been obvious to the surveyor, or which any reasonable surveyor would have enquired about. However, this principle does not extend to unusual features of a risk that a conventional inspection would not reveal. See, for example Pacific Queen Fisheries v. Symes (1963).

In some cases the need to disclose information is made superfluous by reason of the terms of policy. For example, if a personal accident policy excludes injury arising from participation in winter sports the proposer would not be obliged to disclose the fact that he went skiing regularly, unless specifically asked to do so. Similarly, there is no need to disclose matters, however material, which are the subject of an express or implied warranty in the policy. As a general rule, there is no duty to disclose facts which the poposer does not know. See, for example, the life insurance case of Joel v. Law Union (1908). In marine insurance there is a duty to disclose ‘constructive knowledge’. However, this principle does not apply to cases where the insured is a consumer (i.e. non-commercial insurances) unless they deliberately turn a ‘blind eye’ to the obvious. See Economides v. Commercial Union (1977). Convictions that are ‘spent’. Convictions that are ‘spent’ under the Rehabilitation of Offenders Act 1974 need not be disclosed. Question 16 Insurers rarely elect to reinstate because if they decide to do so they become responsible for any problems that arise in the reconstruction process. If insurers do choose to reinstate, the original contract to pay money becomes a contract to provide a restored building (or machinery). If, then, the restored property is defective or in any way inferior to the old property, or there is an unreasonable delay in handing it over, the insurers may have to pay compensation to the policyholder for breach of contract. For example, in Alchorne v Favill (1825) insurers elected to reinstate, but planning restrictions prevented them from rebuilding in the same manner, with the result that the premises were smaller than before. The court held that the insurers were liable to compensate the insured for the difference in value between the old and new buildings. In Brown v Royal Insurance Co (1859) the insurers elected to reinstate a partial loss but were prevented from doing so because the Commissioners of Sewers, using their statutory powers, ordered that the buildings should be demolished owing to their dangerous condition. The court held that the insurers were liable to pay the full value of the building to the insured as damages for breach of the contract to reinstate. However, Brown was decided before the courts developed the doctrine of frustration after the founding case of Taylor v Caldwell (1863). If an unforeseen event made it impossible for an insurer to fulfil their undertaking to rebuild, a modern court might well declare the contract to be discharged by frustration although, of course, the insurers would still have to settle the claim with a money payment.

20 P05EG

Another potential difficulty lies in the fact that, at common law, the insurers cannot limit their expenditure to the sum insured. In fact, insurers usually seek to protect themselves against at least some of these pitfalls by stating in the policy that if they do choose or become obliged to reinstate they will only do so ‘as circumstances permit and in a reasonably sufficient manner’. Policies usually also provide that ‘in no case shall (the insurers) be obliged to expend more than the sum insured’ on reinstatement’. Once insurers elect to reinstate they must do so within a reasonable time and, if they fail, they may be liable to pay damages to the insured for loss of use: see the motor insurance case of Davidson v Guardian Royal Exchange Assurance (1979). Once they have elected to reinstate, insurers are their own insurers during reconstruction. In other words, they are responsible for any further damage (such as a fire on the building site) which may occur during reconstruction. This point was confirmed in Smith v Colonial Mutual Fire Insurance Co Limited. (1880). Here insurers elected to reinstate a house following a partial loss by fire and were not allowed to deduct from the cost of reinstatement after a second fire the amount they had already spent before it happened. Insurers have occasionally chosen to reinstate where they have suspected, but have been unable to prove, fraud on the part of the insured. Furthermore, where there has been a large number of possibly fraudulent claims within the same sector of industry (which sometimes occurs when a particular trade is hit by recession) insurers have sometimes adopted a general policy of reinstatement in order to discourage other policyholders from following suit. Question 17 (a) Market agreements. Sometimes insurers agree amongst themselves to waive (i.e. give

up entirely) their rights of subrogation against third parties. This is particularly common where the third party himself is insured.

The most well-known examples of waiver of subrogation rights are found in the field

of motor insurance, where a network of ‘knock-for-knock’ agreements developed in the UK and in some other countries.

Various other agreements exist. For example, there are ‘immobile property

agreements’ between motor insurers and property insurers that cover impact damage by motor vehicles.

Contractual waiver. Quite often insurers agree with a particular insured that they will

not exercise subrogation rights against certain other parties or persons who are associated with the insured. They can do this by including in the policy a ‘subrogation waiver clause’ which may, for example, state that subrogation rights will not be exercised against affiliated or subsidiary companies of the policyholder.

P05EG 21

(b) Even if there is no such ‘subrogation waiver clause’ in the insurance policy, a business contract between the insured and another person may be construed in such a way as to bar the insurers’ rights of subrogation. For example, if a contract (e.g. a construction contract) between A and B states that certain property shall be ‘at the sole risk of A’ the courts may assume that A had agreed not to sue B for any damage to the property, thus depriving A’s insurers of subrogation rights.

The way in which two or more parties have arranged their insurance may persuade a

court that there should be no subrogation rights. For example, if a business contract states that a person ‘shall have the benefit’ of the insurance arranged by another the courts may assume that the intention was to exempt that person from any liability for a loss to be covered by the insurance. See also Mark Rowlands Limited v Berni Inns Limited. (1986).

Co-insurance cases. Where two or more persons are covered by one policy

subrogation will usually be denied. See, for example, Petrofina Limited, Magnaload Limited (1984). However, if one co-insured ceases to be covered by the insurance subrogation may be allowed. See for example Samuel v Dumas (1924).

Public policy. Following Lister v Romford Ice and Cold Storage Limited (1957)

insurers generally have agreed to give up their subrogation rights against negligent workers who injure their fellow employees in the course of employment. However, a more recent case where the facts were similar, Morris v Ford Motor Co. (1973), fell outside this agreement because the injured worker was not a fellow employee, but a worker from another firm. One of the judges, Lord Denning MR, denied subrogation on grounds of public policy, arguing that industrial relations would be harmed if employees could be sued personally in cases like this.

22 P05EG

Question 18 Insurance policies usually require the insured to take reasonable precautions to avoid loss or damage and also and to take reasonable steps to minimise any loss that actually occurs. The latter duty – to mitigate loss – may even apply automatically, as a matter of law. If the steps taken are reasonable efforts to prevent or limit the operation of an insured peril the insurers are liable for any damage to the subject matter that results, this action being regarded as part of the insured peril itself. See Stanley v Western Assurance Co (1868) and Canada Rice Mills v Union Marine and General Insurance Co (1941). However, the insured peril must exist and it must either be actually operating or imminent (about to operate). So, in our case the insurers would be liable only if there was a real and immediate risk of flood. Although damage to the insured subject matter is covered if the damage is the result of reasonable efforts to avoid or reduce the impact of an insured peril, the English courts have refused to allow recovery for mere prevention costs, i.e. expense incurred to prevent damage being caused to the subject matter by an insured peril. See for example, in Yorkshire Water Services Limited v Sun Alliance and London Insurance plc (1997) where the claimants incurred expense in repairing an embankment in order to prevent sewage sludge from escaping into the adjacent river. The court rejected the claim on a number of grounds including the fact that the policy contained the usual clause requiring the insured to take reasonable precautions to avoid loss, since this made it clear that any prevention costs were to be at the insured’s own expense. On this basis Arthur may be able to recover £1,000 for the damage to his crops, which are part of the insured property (provided the risk of flood was real and imminent) but, probably, not the £9,000 paid to contractors, which appear to be mere prevention costs. This is even more likely to be the case if the policy contained the usual clause requiring the insured to take reasonable precautions to avoid loss, since this would make it clear that any prevention costs were to be at the insured’s own expense.