FORMATION OF AN INSURANCE CONTRACT

• Insurance contracts are usually standard form contracts and as such

there is no real negotiation of it’s terms, the agreement being, on the
part of the insurers, to issue and on the part of the proposer, to take, a
policy in the ordinary form issued by the insurers. Thus insurance
contracts are usually contracts of adhesion. The insured seldom
participates in the drafting of the contract. Ordinarily, the insurer
offers the insured set conditions in a contract document on a “ take-it
or leave-it basis”.
• See the words of Bruce J in Acme Wood Flooring Ltd vs. Marten
[1904]
Cont…
Acme Wood Flooring Co. Ltd vs. Marten (1904) 9 Com.Cas.157
“Where a person insures with Lloyd’s he must be taken to accept the
terms expressed in the policy and to agree to the meaning which the
words ordinarily bear.
• See also General Accident Insurance Corporation vs. Cronk [1901]
17 TLR 233
Where it was held that when the proposer applied for the ordinary form
of policy issued by the insurer it was not necessary that he should
approve of all the terms of the policy before the contract become
complete and he must therefore be taken to have agreed to be bound by
them.
Cont….
• The following are important
1. There must however be a clear agreement as to the distinctive
features of the particular contract.
2. The contract must be certain in that:
a) The insurers must have agreed to insure the subject matter And
b) The assured or insured must have agreed to be covered/insured by
the particular insurer (s).

See Mackie vs. European Assurance Society [1869] 21 LT 102

Cont…
Mackie vs. European Assurance Society [1869] 21 LT 102
In this case the proposed assured on discovering that the cover note
was issued by different insurers reserved the right to be satisfied as to
their standing, and when the fire happened took steps to enforce the
cover note. This cover note was in effect an offer by such insurers. It
purported on the face of it to be in force for a month and the insurers
had not withdrawn it. The conduct of the assured in taking steps to
enforce the cover note may be regarded as an acceptance of the offer.
If however there had been no fire and the proposed assured had done
nothing to indicate acceptance, it seems clear the insurers could not
have maintained an action for the premiums.
Cont…
3. There must be consensus ad idem as regards the subject matter of
the insurance.
4. The period of insurance must be fixed.
5. There must be agreement as to sum to be insured.
6. There must be agreement on the premiums to be paid.
7. Finally it must be clear that there was in fact an offer to enter into
the contract on the one side followed by an acceptance of the
offer on the other and that thus a complete contract resulted.
Cont….
• In summary the contract of insurance must satisfy the basic
requirement of a contract at common law.
• That is an offer by one party must be unequivocally accepted by the
insurer. Consideration must be furnished, the parties must have
intended their dealings to give rise to a contract and the purpose of the
agreement must have been legal.
• Usually the acceptance of the offer will not take place at once and
before it does it is the practice for a “cover note” to be issued.
• Before acceptance neither party is bound and either may withdraw at
pleasure.
Cont……
• After acceptance there is a contract from which neither party can
withdraw binding the assured to pay the premiums and the insurers to
accept the premium when tendered, to issue a policy and to pay any
sums that may become payable under the terms of the contract.
• The various steps in the negotiations leading up to a contract of
insurance are usually recorded in certain formal documents which are:
a) The Proposal
b) The Cover Note
c) Finally The Policy
Cont….
• The absence however of any of such documents does not necessarily
lead to the inference that there is no contract of insurance between the
parties.
• The position of the parties during the preliminary negotiations leading
up to the completion of a contract of insurance is much the same as the
case of any other contract except that the contract being a contract of
uberrimae fidei utmost good faith is required from both parties.
• The proposer is under duty to disclose to the insurer all material facts
relating to the proposed insurance and not to make any
misrepresentation.
Cont…..
• Afterwards the assured becomes liable to pay the premiums to the
insurer.
• The case of Jupiter General Insurance Co vs Kassanda
Cotton(1966) EA 252. illustrates that you can have an oral contract.
But in practice today that is not possible. The contract must be
embodied on a document, some note or memorandum. But the law
does not require a written contract: the general principles of contract
apply. A contract of insurance is generally not subject to any legal
formalities.
Cont….
• See the case of Jupiter General Insurance Co vs Kassanda Cotton.
[1966] EA 252; Murfit vs. Royal Insurance Co [1922] 38 TLR 334;
Ackanm vs.Policy Holders Protection Board {1922} 2 Lloyds Ref 221
• However marine insurance contracts must be written.
• Section 22 (1) of the Marine Insurance Act provides that a contract
of marine insurance is inadmissible in evidence unless it is embodied
in a policy in accordance with the Act.
• Under section 23 the policy must certify:
Cont….
• Under section 23 the policy must certify:
1. The name of the insured or the person who effects the policy on behalf of the
insured.
2. Subject matter of the insurance and the risk insured against, the voyage,
period of time covered by the policy, sum or sums insured.
3. Particulars of the insurer.
• Under section 24 the policy must be signed by or on behalf of the
insurer.
• Life, fire and other types of insurance are not subject to such statutory
formalities.
Cont…..
• However, under the Stamp Duty Act an insurance policy must have a duty
imprint on its face failing which it is inadmissible in evidence and the
insurer is liable to a fine. By reason of this provision there is a presumption
that an insurance contract must be embodied in a written policy document.
1. THE OFFER
• Since the contract of insurance is constituted by the acceptance of an offer,
it is necessary in the first instance to make certain that an offer has in fact
been made which is capable of being accepted.
• To constitute an offer capable of being accepted the following conditions
must be fulfilled
1. The alleged offer must be intended to be an offer by the party making the offer.
The party who begins the negotiations does not necessarily make an offer ; he may
merely indicate his readiness to consider the offer.
Cont…..
2. The alleged offer must be complete-it must show with precision the contract
into which the party making it is prepared to enter.
3. The alleged offer must be communicated to the other party.
4. The alleged offer must be in force at the time when the other party purports
to accept it.
• Any offer may be revoked before acceptance and an offer once
revoked ceases to be in force and cannot afterwards be accepted unless
repeated.
• The offer is usually made using a Proposal Form.
Cont….
a) THE PROPOSAL FORM
• The proposal forms necessarily vary in their content according to the nature of the
proposed insurance.
• They also vary according to the practice of the different insurers.
• All proposal forms however contain questions which the proposed assured is
required to answer and these questions whatever the nature of the insurance are
framed on the general line geared towards extracting material facts from the
proposed insured.
• The matter to which the questions relate may be classified as follows
a) The description of the proposed assured.
b) The description of the risk proposed to be insured.
c) The description of circumstances affecting the risk.
d) The previous history of the proposed assured and past claims history.
e) Period of insurance required.
Cont….
• In insurance contracts the offer is made by the proposer by
completing and submitting the proposal form to the insurer.
• The proposal form is standard and its terms are not subject to bargain
or negotiation. The proposer’s offer must be as complete as possible in
materiality and must be communicated to the insurer.
• The proposer must have an insurable interest in the subject matter.
• The proposal form is the document furnished by the insurer for
completion by the proposer and varies in form and content depending
on the character of cover sought. It solicits specific information in
relation:
Cont…..
1. Particulars of the proposer, that is name, postal address, occupation,
residence, etc.
2. The risk or risks to be insured. The proposer must specify the events to be
covered as well as the duration of cover.
3. Circumstances affecting the risk. These are circumstances peculiar to the
subject matter.
4. History of the subject matter, for example, whether risk has previously
attached, previous insurance, refusal to insure if any, cancellation of
insurance etc. (these are material facts)
• The contents of the proposal form enable the insurer to make a fair
decision on whether or not to take the risk and how much premium to
charge.
Cont…..
• In addition, the proposer declares that the information provided is true
and forms the basis of the contract between them. Re Yagar v
Guardian Assurance Co (1912) 108 MT 38; Stir Fire and Burglary
Insurance Co v Davidson (1902) 5 AS 38; Interfoto Picture Library
Ltd v Silhouette Visual Programmes Ltd (1989) QB 433; Rust v
Abbey Life Assurance Co. (1979) 2 Lloyds Report 334
• Submission to the insurer of a completed proposal form constitutes the
formal offer by the proposer and if accepted a contractual relationship
exists between them.
THE EFFECT OF THE PROPOSAL FORM
• The proposal form which is duly filled in and signed by the proposed
assured and forwarded to the insurer, operates as a formal offer by the
proposed assured to insurers to enter into a contract of insurance.
• The proposal form shows the terms upon which he is willing to
contract and if the offer is accepted he cannot insist upon having an
insurance differing in its terms from those specified in the proposal.
• Since the proposal form in practice proceeds from the insurers, it
further shows the terms upon which they too are willing to contract.
They are bound therefore after acceptance to issue a policy in
accordance with the proposal.
b) THE COVER NOTE
• A proposal is not necessarily accepted at once since the insurance
company may take time to consider it.
• If the proposal is sent through an agent, the agent usually has no
authority to accept it himself, but must forward it to the insurer in
order that they may decide whether to accept it or not.
• There is therefore as a matter of practice an interval of time between
the making of the proposal and the final decision, so it is the practice
of insurance companies in the case of some types of insurance
especially burglary and fire insurance to give the proposer protection
by the issue of a “cover note”.
Cont….
• Cover Notes are not issued in Life Insurance . They are also not issued in
motor insurance since it is mandatory to insure a vehicle under the Insurance
(Motor Vehicle Third Party) Risks Act, Cap. 405 and what is given out to
the insured is not a cover note but a certificate of insurance.
• Submission to the insurer of a completed proposal form constitutes the
formal offer by the proposer and if accepted a contractual relationship exists
between them.
• Before cover is extended the insurer must ascertain whether the offer is
worth during which time the proposer may remain uninsured.
• In property insurance insurers grant a cover note in the meantime.
• This is technical terms used to describe the temporal insurance cover
extended to the proposer between presentation of the proposal form and its
acceptance or rejection.
Cont….
• It is argued that
1. Before insurance cover is extended care must be taken to assess and
ascertain the risk being undertaken.
2. The insurance industry is rigid and formal, hence the need for more time.
• As explained in the case of Julian Bright v HG Poland (1960) Lloyds
Report 420 the typical motorist is impatient and requires immediate
cover before the traditional steps are followed.
• The cover note needs not be a formal note; it suffices if the insurer
intimates to the proposer that cover has been extended from a
particular date.
Cont…
In the case of Murfit v The Royal Insurance Company ,Ltd (1922) 10
Ll.L.Rep. 191 it was held that a letter from the head office of the
company indicating that cover had been extended in a particular
situation constituted a cover note.
• The cover note operates as a contract between the proposer and the
insurer on the terms and conditions embodied therein or imputed from
the type of the policy applied for.
• The insured is entitled to enforce the contract evidenced by a cover
note should the risk attach.
Cont….
• If the document is comprehensive the insured recovers on the basis of
its terms and conditions, if not he recovers on the terms of the policy
applied for.
• The cover note is ordinarily effective for 30 days.
• The legal effect of the cover note lapses when the insurer issues a
policy or communicates his rejection of the proposal form.
Cont….

• When the policy is finally issued, its effect is backdated to the date of
issue of the cover note. Section 75 of the Stamp Duty Act, provides
that a policy should be issued within 30 days of receipt of the proposal
form. However, in practice, the duration of cover note varies.
• If the insurer declines to take the risk such refusal must be
communicated to the proposer so as to bring to an end the effect of the
cover note. If no refusal is communicated the cover note remains
effective and the insurer is liable should the risk attach. Illustrative case
is that of Cartwright v MacCormack Trafalgar Insurance Co. (1963)
1 AII ER 11.
Cont…..
The insurance company had issued a temporary cover note granting the
insured comprehensive motor-car insurance. He was involved in a road
accident at 5.45 pm on December 17,1959 and the question was
whether the company was bound to indemnify him in respect of the
damages which he had to pay a motor-cyclist who had been injured.
The cover note contained a column entitled “Effective Time and Date
of Commencement of Risk”. Under the Column “Time” was written
“11.45” and under the column “Date” was written “2.12.59”
Another part of the note contained the words “This cover note is only
valid for 15 days from the commencement of risk”. Also included in
the note was a statement “under no circumstance is the time and
commencement of risk to be prior to the actual time of issue of this
Cont…..
…cover note”. The insurance company contended that it was not liable
because the period for which the note had been issued had expired i.e.
that the period started at 11.45 am on December 2 and expired at 11.45
am on December 17 six hour before the accident happened.
The court held that the time did not begin to run until midnight of
December 2 and consequently the insured was entitled to be
indemnified”.
The court of appeal also stated inter alia that an insurer must signify
his rejection of the proposal form expressly in order to bring to an end
of the binding nature of the cover note. The legal effect of the cover
note lapses when the insurer issues the policy.
Cont….
• The effect of the policy is backdated to the date of the cover note. Jadavyi v
Shanji , Panday v Oriental fire and General Insurance Co (1957) 21;
General Re-Insurance Case (1982) QB 1022, Stockton v Mason (1978) 2
LR 430

1. THE EFFECT OF THE COVER NOTE

• The cover note is in itself a contract of insurance governing the rights and
liabilities of the parties in the event of a loss taking place during its
currency.
• The assured is therefore entitled to enforce the contract contained in the
cover note provided that he has complied with its conditions e.g. as to
payment of premium.
2. THE ACCEPTANCE
• There cannot be an acceptance so long as the terms of the contract of
insurance are still under discussion and the premium remains to be
fixed .
• The offer must be complete on the face of it and the acceptance must
be in the very terms of offer.
• If the acceptance departs from the offer by introducing fresh matter or
if it comes from insurers other than those to whom the offer was made
there is no contract between the parties even though a policy may have
been issued.
Cont…..
• Such an acceptance is equivalent to a counter-offer which must in its turn be
accepted before the parties are bound. In other words the common law rules
of contract in respect of offer and counter- offer and acceptance applies.
METHODS OF ACCEPTANCE
• An insurer is not bound to accept any proposal form.
• He has the sole prerogative to accept or reject the offer.
• However, refusal must be communicated promptly.
• The insurer cannot while accepting the proposal form vary its terms without
the concurrence of the proposer.
• An insurance may signify acceptance of the proposal form in various ways:
Cont…..
1. Formal Communication. Where there is an express intimation by the
insurer to the proposer that the insurers have accepted the proposal form
then the risk attaches and begins to run. This usually occurs when the
insurers issue insurance certificates before the policy itself is issued as
commonly practiced in motor vehicle insurance.

Canning v Hoare (1885) 14 TLR 526

In this case a letter formally accepting the proposal contained a notice that no
insurance was to be effective until the premium had been paid.
Thus an insurer can postpone the operative date of the policy until such date
as the premium is paid. However, if unconditional policy of insurance is
issued the mere fact that premium has not been paid does not vitiate the
contract.
Cont….
2. Issue of the policy. Generally issuance of the policy by an insurer is
conclusive evidence of acceptance of the proposal form. The policy
becomes effective from the date of issue notwithstanding any defects
in the proposal form.
McElroy v London Assurance Corporation (1894) 24 Lloyd Report
287.
Where the proposer had not signed or authenticated the proposal form
Cont….
…but the insurer issued a policy. A subsequent attempt by the insurer to
cancel the policy on the ground of the defect in proposal form failed. It
was held that the policy was binding as its issue was conclusive
evidence that the insurer had accepted the proposal form.
• However, issue of the policy is not conclusive evidence if:
1. The insured does not treat it as such and continues negotiation.
2. Where the policy departs from the terms and conditions of the
proposal form by introducing new terms: Pear Life Assurance
Co. v Johnson (1909) 2 KB 88
Cont….
3. By Conduct of the insurer. The fact that the insurer has not
communicated with the proposer or has not issued a policy does not
necessarily mean that cover has not been extended. The insurer’s
conduct may be unequivocal that there is cover. Jupiter v General
Insurance; Adie and Sons v Insurance Corporation Ltd (1898) 14 TLR
544; Re Yager Guardian[1912] LT 38; Thompson v Adams [1889]23
QBD 361; White Well v Auto Car Fire and Accident Insurance Co. [1927]
27 Lloyds Rep.41.
4. Acceptance of Premium. Acceptance and retention of premium by the
insurer gives rise to a presumption of an acceptance of a proposal form.
However, such acceptance and retention does not impose a duty on the
insurer to issue a policy. In McElroys Case, Lord Maclaven observed in
page 291: “The company is not bound to deliver a policy without the
payment of the premium. If they accept
Cont….
…a premium before delivering a policy I should be disposed to hold that
the acceptance of the premium and the delivery of the receipt therefore
was sufficient to create the obligation to issue a policy unless
circumstances can be shown to the contrary.”
• Acceptance of the proposal form marks the end by the insurer of the
proposer’s duty to disclose material facts.
• As a general rule the insurer cannot avoid the contract on the ground
of nondisclosure of facts discovered after acceptance of the proposal
form. Whitewell v Auto Fire and Accident Insurance Co (1927) 27
Lloyds Ref 41); Re Economic Fire Office (1896) 12 TLR 142;
Harrington v Pearl Life Assurance Co (1913) 30 TLR 24.
EFFECT OF ACCEPTANCE
• On the acceptance of the proposal the negotiations come to an end and the
duty of disclosure ceases.
• The assured therefore is under no obligation either to disclose any material
facts which only come to his knowledge or to correct any misrepresentation
the inaccuracy in which is only discovered after acceptance.
• An acceptance once given binds the parties and cannot be withdrawn except
by mutual consent.
• The parties are bound to each other as from the date of the acceptance the
assured to take the policy and to pay the premium, the insurers to issue the
policy, to accept the premium when tendered and to pay for the loss when it
happens.
Cont…..
• After a final acceptance the insurers cannot depart from it by
attempting to introduce fresh terms into the policy, the assured is
entitled to insist upon a policy in the very terms of the proposal.
• Moreover any such attempt on the part of the insurer does not relieve
the assured from the obligation of performing the contract into which
he has in fact entered.
TERMINATION OF INSURANCE CONTRACTS
• Termination of an insurance contract limits the obligation of the
parties thereto. Insurance contracts may come to an end or terminate in
the following ways:
Cont…..
1. Payment of the sum assured or total indemnity when risk
attaches –in property insurance, total indemnity discharges the
contract while in non-indemnity contracts, payment of the sum
assured when risk attaches or on maturity discharges the contract.
Reinstatement from partial loss does not terminate the contract.
2. Agreement or mutual consent – parties by mutual consent may at
any time agree to cancel the policy thereby terminating the contract.
The parties’ minds must be ad idem. See Reyner vs Hall [1813] 4
Lloyds Rep. 12
Cont….
In life insurance the insured is entitled to the surrender value of the policy.
Under section 89 of the Insurance Act, if an insured surrenders a policy to
the insurer, he is entitled to a partial reimbursement of up to 2/3 of the total
premiums paid inclusive of interest and bonuses payable provided he has
been a bona fide insured for at least 3 years.
In indemnity contracts, surrender of the policy before the end of the year,
entitles the insured to its surrender value.
3. Breach of warranty [conditions]- an insurer may apply to the court for
cancellation of an insurance policy for breach of a warranty by the insured
e.g. non-disclosure of material facts or misrepresentation of facts. See
Jubilee Insurance Co vs John Sematengo [1965] EA 233
Cont…
Jubilee Insurance Co vs John Sematengo [1965] EA 233
The plaintiff Insurance Co. filed an action against the defendant for a
declaration that the co. was entitled to avoid a motor insurance policy
on the ground that the same had been obtained by non-disclosure of
material facts and misrepresentation of facts.
The insured had inter alia failed to disclose the fact that the subject
matter of the insurance had been involved in an accident the day
before it was insured and that it had a major mechanical defect.
It was held that the insurance co. was entitled to avoid the contract. In
the words of Sir Udo Udoma
Cont…….
“The plaintiff co. is entitled to the declaration sought because it has
satisfactorily discharged the onus which is upon it of establishing by a
preponderance of evidence that the insurance policy and the certificate
were obtained by the defendant by the non-disclosure of material facts
or by misrepresentation of facts which was false in some particulars.”
• See also The Motor Union Insurance Co. Ltd vs. A.K Ddamba
[1963]EA 271
Cont…
• Operation of Law –an insurance contract terminates if circumstances
render its sustainability impossible e.g. Liquidation or winding up of
the insured will mark the end of indemnity contracts as the insurable
interest is transferred to the person put in administration. Death of the
insured will normally lead to termination of life contracts and lead to
the payment being due. Sale or transfer of the subject matter will also
lead to the loss of insurable interest and thus terminate the contract of
insurance. See Kinyanjui vs South India Insurance Co. Ltd [1968]
EA 160
Cont…
The plaintiff had obtained judgment under the Fatal Accidents Act,
Cap 32 Laws of Kenya, against the driver and alleged owner of the
bus. The insurance company disclaimed liability on the ground that
though the alleged owner had taken out a policy, the bus was being
operated by a company to which it had been transferred and hence the
alleged owner had no insurable interest. It was held that since the
company owned and operated the bus and had engaged its own driver,
the company alone had an insurable interest in the bus. The transfer of
the bus to the company terminated the insurance cover hence there
was no cover at the time of the accident.
Cont…..
• See also Peter vs General Accident and Life Assurance Co. Ltd [1037] 4 ALL
ER 628
• An insurance policy is a contract of a personal indemnity, and the insurers
cannot be compelled to accept responsibility in respect of a third party who
may be quite unknown to them. An exception to this rule is where a statute
obligates an insurance company to pay third parties in certain instances as
is the case with the Insurance ( Motor Vehicle Third Party Risks) Act, Cap.
405, Laws of Kenya.

5. Lapse [Effluxion of time] – Indemnity contracts run for a year and on

expiry of their duration lapses unless renewed by mutual consent.
Scope of a policy of insurance
•For a risk to be secured by a policy of insurance, it is
imperative that the contingency must happen during the
subsistence of the policy. It is sufficient that, although the
peril insured against manifests fully or the extent of loss is
discovered after the period of insurance, it occurs during the
period of insurance. But, it was held in Hutchins Brothers v
Royal Exchange Assurance[1912] 2 KB 398 that when the
peril occurs before the policy has taken effect and only
manifests itself after the cover has been granted, the loss is
not recoverable.