Insurance
Commercial law in Scotland
Bird’s Modern Insurance law- for detailed reading!
Introduction
Insurance underpins virtually all commercial activities and many personal ones. Insurance is also a very
important commercial activity, employing in the United Kingdom about the same number of people as
live in Edinburgh. It helps to subsidise risk and is also a legal requirement for several activities like car
insurance. (textbooks don’t cover everything) Changes are being effected at the moment- as the
commission is working on several things.
1. Nature of Insurance Contract and Types of Insurance
It is essentially a contract of indemnity and thus you can obtain the amount you have loss and may get
up to the sum insured and only get actual loss or direct or consequential loss.
Essentially, there are two types of insurance:
(1) indemnity insurance - the insured is indemnified against loss, damage or destruction suffered, e.g.
motor insurance, fire insurance, theft insurance, marine insurance, building and contents insurance, etc.
The event is uncertain to occur, but if it does the loss is covered.
(2) life assurance - the insured event, i.e. death, is certain to occur. However, the precise timing of the
death is uncertain. This is not a contract of indemnity. There is no chance per se but the uncertainty is
when the death is going to occur.
Uncertainty is common to all insurance transactions.
With a couple of exceptions Scots and English Law on insurance are identical:
The Marine Insurance Act 1906 applies in both jurisdictions. This Act codified the common law
and the great majority of the principles set out in the Act apply equally to non-marine insurance.
They apply to contracts of general indemnity contract as the principle applies to indemnity
contracts.
The Consumer Insurance (Disclosure and Representations) Act 2012 applies to consumer
insurance contracts in England, Wales and Scotland.
2. Purpose of Insurance: Guarding Against Uncertainty and Risk
Insurance is designed to provide safeguards in the event of misfortune or the occurrence of a risk. The
person who places a bet and also another who insures are likely to get paid in the event of an uncertain
occurrence- the difference is that when insuring you are trying to minimise or almost eliminate risk.
,The key element in the practice of insurance is the spreading of the losses of the few who actually incur
them amongst the many who buy the coverage and pay the premiums.
The key to understanding insurance law is to remember that the insured knows much more about the
risk he wishes to have insured, and the perils to which it is subject, than the insurer. The insurer
provides insurance for profit, like a normal commercial entity, and as such he will not want to offer
unlimited cover against every eventuality. The law protects the insurer by requiring the insured to make
full and accurate disclosure of material facts and also by providing that breach of a fundamental term of
the contract (“warranty”) automatically brings the contract to an end. This normally affects the amount
of premiums one pays. However – note the effect of the Consumer Insurance (Disclosure and
Representations) Act 2012 to consumer contracts (details below).
3. Regulation of Insurance
The activities of insurers are regulated by the Financial Services and Markets Act 2000 (FSMA) -
essentially to ensure that insurance companies are adequately capitalised (there is enough capital in the
firm or the insurance company) and run by fit and proper persons. FSMA also provides a specific dispute
resolution mechanism under the auspices of the Financial Services Ombudsman in consumer cases.
Insurance contracts are specifically exempted from the Unfair Contract Terms Act 1977- this was due to
the efforts of negotiations between the government and insurance lobbyists- but not the Unfair Terms
in Consumer Contracts Regulations 1999.
Third Parties (Rights Against Insurers) Act 1930 - provides those with claims against an insolvent insured
with a direct right of action against the insolvent insured’s indemnity Insurer. A claim against B who is
insured by C, B becomes insolvent so A can recover directly from C. The 2010 Act has not yet been
enforced.
Part XV of the Financial Services and Markets Act 2000 provides funds, contributed to by all Insurers
practising in the United Kingdom and administered by the Financial Services Compensation Scheme Ltd.,
with which to discharge 90% of the liabilities of insolvent insureds.
4. Definition of Insurance
There is no single definition of insurance that is regarded as thoroughly satisfactory by practitioners,
lawyers and academics. The following are judicial efforts at a definition.
Scottish Amicable v Northern Assurance Company 1883 11 R 287, LJ-C Moncreiff
It is a contract … by 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.
, Prudential Insurance Co v Inland Revenue Commissioners [1904] 2 KB 658, Channel J
It must be a contract whereby for some consideration, usually but not necessarily for periodical
payments called premiums, you secure to yourself some benefit, usually but not necessarily the
payment of a sum of money, upon the happening of some event. The idea that the insured pays
premium and the insurer would pay out in the event of the uncertain event.
The Medical Defence Union Limited –v- Department of Trade [1980] Ch 82, Sir Robert Megarry VC:
It appears that a contract is a contract of insurance if three elements are present…First, the contract
must provide that the assured will become entitled to something on the occurrence of some event…
Secondly, the event must be one that involves some uncertainty…Thirdly, the assured must have an
insurable interest in the subject-matter of the contract.
The “benefit” must be a sum of money or an equivalent service measurable in financial terms:
Department of Trade and Industry v St Christopher’s Motorists Association [1974] 1 WLR 99- members
pay premium to the D for a driver in the event the member cannot drive for a period of up to 12
months. The court held that there was a contract and it provides a benefit tot the member and it can be
valued for the money’s worth and the benefit would only occur if there is an uncertain event that would
occur and had all the characteristics of insurance and so was a contract of insurance.
The right to the benefit must be certain: Medical Defence Union v Department of Trade [1980] Ch. 82-
The Insurance Companies Act 1974 made provision in Part II for the regulation by the Department of
Trade of insurance companies which carried on in Great Britain certain classes of insurance business by
means of a contract of insurance.
The term "contract of insurance" was not defined in the Act.
The Medical Defence Union Ltd., formed in 1885 as a company limited by guarantee, claimed that it was
not an insurance company carrying on any class of insurance business within the meaning of the Act and
was therefore free from the system of control set up under it. It had a present membership of some
75,500 doctors and 4,500 dentists paying appropriate rates of subscription, their contract with the union
being constituted by the union's acceptance of an application for membership on the terms of the
union's memorandum and articles.
Among its objects were the conduct of legal proceedings on behalf of members, indemnifying them
against claims for damages and costs, and giving advice on various problems, including employment,
defamation and professional and technical matters.
The articles gave power to the council of the union at its discretion (1) to undertake the conduct or
defence of any matter or proceedings concerning a member's professional character or interests, and (2)
to grant to any member from union funds an indemnity regarding any action, proceeding, claim or
demand concerning his professional character or interests. In every case, an indemnity could be granted,
restricted or declined in the council's absolute discretion.
Commercial law in Scotland
Bird’s Modern Insurance law- for detailed reading!
Introduction
Insurance underpins virtually all commercial activities and many personal ones. Insurance is also a very
important commercial activity, employing in the United Kingdom about the same number of people as
live in Edinburgh. It helps to subsidise risk and is also a legal requirement for several activities like car
insurance. (textbooks don’t cover everything) Changes are being effected at the moment- as the
commission is working on several things.
1. Nature of Insurance Contract and Types of Insurance
It is essentially a contract of indemnity and thus you can obtain the amount you have loss and may get
up to the sum insured and only get actual loss or direct or consequential loss.
Essentially, there are two types of insurance:
(1) indemnity insurance - the insured is indemnified against loss, damage or destruction suffered, e.g.
motor insurance, fire insurance, theft insurance, marine insurance, building and contents insurance, etc.
The event is uncertain to occur, but if it does the loss is covered.
(2) life assurance - the insured event, i.e. death, is certain to occur. However, the precise timing of the
death is uncertain. This is not a contract of indemnity. There is no chance per se but the uncertainty is
when the death is going to occur.
Uncertainty is common to all insurance transactions.
With a couple of exceptions Scots and English Law on insurance are identical:
The Marine Insurance Act 1906 applies in both jurisdictions. This Act codified the common law
and the great majority of the principles set out in the Act apply equally to non-marine insurance.
They apply to contracts of general indemnity contract as the principle applies to indemnity
contracts.
The Consumer Insurance (Disclosure and Representations) Act 2012 applies to consumer
insurance contracts in England, Wales and Scotland.
2. Purpose of Insurance: Guarding Against Uncertainty and Risk
Insurance is designed to provide safeguards in the event of misfortune or the occurrence of a risk. The
person who places a bet and also another who insures are likely to get paid in the event of an uncertain
occurrence- the difference is that when insuring you are trying to minimise or almost eliminate risk.
,The key element in the practice of insurance is the spreading of the losses of the few who actually incur
them amongst the many who buy the coverage and pay the premiums.
The key to understanding insurance law is to remember that the insured knows much more about the
risk he wishes to have insured, and the perils to which it is subject, than the insurer. The insurer
provides insurance for profit, like a normal commercial entity, and as such he will not want to offer
unlimited cover against every eventuality. The law protects the insurer by requiring the insured to make
full and accurate disclosure of material facts and also by providing that breach of a fundamental term of
the contract (“warranty”) automatically brings the contract to an end. This normally affects the amount
of premiums one pays. However – note the effect of the Consumer Insurance (Disclosure and
Representations) Act 2012 to consumer contracts (details below).
3. Regulation of Insurance
The activities of insurers are regulated by the Financial Services and Markets Act 2000 (FSMA) -
essentially to ensure that insurance companies are adequately capitalised (there is enough capital in the
firm or the insurance company) and run by fit and proper persons. FSMA also provides a specific dispute
resolution mechanism under the auspices of the Financial Services Ombudsman in consumer cases.
Insurance contracts are specifically exempted from the Unfair Contract Terms Act 1977- this was due to
the efforts of negotiations between the government and insurance lobbyists- but not the Unfair Terms
in Consumer Contracts Regulations 1999.
Third Parties (Rights Against Insurers) Act 1930 - provides those with claims against an insolvent insured
with a direct right of action against the insolvent insured’s indemnity Insurer. A claim against B who is
insured by C, B becomes insolvent so A can recover directly from C. The 2010 Act has not yet been
enforced.
Part XV of the Financial Services and Markets Act 2000 provides funds, contributed to by all Insurers
practising in the United Kingdom and administered by the Financial Services Compensation Scheme Ltd.,
with which to discharge 90% of the liabilities of insolvent insureds.
4. Definition of Insurance
There is no single definition of insurance that is regarded as thoroughly satisfactory by practitioners,
lawyers and academics. The following are judicial efforts at a definition.
Scottish Amicable v Northern Assurance Company 1883 11 R 287, LJ-C Moncreiff
It is a contract … by 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.
, Prudential Insurance Co v Inland Revenue Commissioners [1904] 2 KB 658, Channel J
It must be a contract whereby for some consideration, usually but not necessarily for periodical
payments called premiums, you secure to yourself some benefit, usually but not necessarily the
payment of a sum of money, upon the happening of some event. The idea that the insured pays
premium and the insurer would pay out in the event of the uncertain event.
The Medical Defence Union Limited –v- Department of Trade [1980] Ch 82, Sir Robert Megarry VC:
It appears that a contract is a contract of insurance if three elements are present…First, the contract
must provide that the assured will become entitled to something on the occurrence of some event…
Secondly, the event must be one that involves some uncertainty…Thirdly, the assured must have an
insurable interest in the subject-matter of the contract.
The “benefit” must be a sum of money or an equivalent service measurable in financial terms:
Department of Trade and Industry v St Christopher’s Motorists Association [1974] 1 WLR 99- members
pay premium to the D for a driver in the event the member cannot drive for a period of up to 12
months. The court held that there was a contract and it provides a benefit tot the member and it can be
valued for the money’s worth and the benefit would only occur if there is an uncertain event that would
occur and had all the characteristics of insurance and so was a contract of insurance.
The right to the benefit must be certain: Medical Defence Union v Department of Trade [1980] Ch. 82-
The Insurance Companies Act 1974 made provision in Part II for the regulation by the Department of
Trade of insurance companies which carried on in Great Britain certain classes of insurance business by
means of a contract of insurance.
The term "contract of insurance" was not defined in the Act.
The Medical Defence Union Ltd., formed in 1885 as a company limited by guarantee, claimed that it was
not an insurance company carrying on any class of insurance business within the meaning of the Act and
was therefore free from the system of control set up under it. It had a present membership of some
75,500 doctors and 4,500 dentists paying appropriate rates of subscription, their contract with the union
being constituted by the union's acceptance of an application for membership on the terms of the
union's memorandum and articles.
Among its objects were the conduct of legal proceedings on behalf of members, indemnifying them
against claims for damages and costs, and giving advice on various problems, including employment,
defamation and professional and technical matters.
The articles gave power to the council of the union at its discretion (1) to undertake the conduct or
defence of any matter or proceedings concerning a member's professional character or interests, and (2)
to grant to any member from union funds an indemnity regarding any action, proceeding, claim or
demand concerning his professional character or interests. In every case, an indemnity could be granted,
restricted or declined in the council's absolute discretion.
