INSURANCE CONTRACTS

The purpose of insurance

Insurance is, in essence, a mechanism whereby risk can be transferred to an insurer. Some risks (for example, the destruction of one's home by fire) carry such severe financial consequences that it is not possible for one person to make adequate provision for the possibility of the occurrence of the risk. Insurance offers a means for a large number of people to contribute to a fund that will meet the cost of specific forms of loss or damage. As only a fraction of the contributors is likely to suffer loss in any one year, the cost can be borne more easily by a large number than by an individual. This spreading of risk across large numbers makes it possible for insurers to charge premiums which represent only a fraction of the sums that can be recovered by an insured who suffers a loss. In order for the mechanism to work fairly it is necessary that policyholders contribute to the common fund according to the degree of risk that they pose and withdraw from it according to the cover agreed in their policy. Also, since the insured knows much more about the risk they wish to have insured, they must provide all relevant information to the insurer. These objectives are reflected in the various principles of insurance law which are discussed in this chapter. Much of insurance law involves the interaction of: (a) the law of contract; and (b) the regulatory regime applicable to those contracts and those authorised to engage in regulated activities.

Definition of an insurance contract

The Marine Insurance Act 1906 (the ‘1906 Act’) defines contract of marine insurance as ‘a contract whereby the insurer undertakes to indemnify the assured, in manner and to the extent thereby agreed, against marine losses, that is to say, the losses incident to marine adventure’. The following features of a contract of insurance were pointed out judicially in Scottish Amicable Heritable Securities Association Ltd v Northern Assurance Co. In that case, Lord Justice-Clerk Moncreiff defined insurance as a contract in which ‘the insurer undertakes, in consideration of the payment of an estimated equivalent beforehand, to make up to the assured any loss he may sustain by the occurrence of an uncertain contingency’