The general of the general law contract discussed in the previous lesson the contract of fire insurance is also subject to certain special principles evolved under common law through judgments given by English courts during the last 200 years.
1) Utmost good faith
2) Insurable interest
3) Indemnity subrogation and condition
Some of these common law principles are specifically referred to in the policy either for the sake of emphasis so that the insured is made aware of their application or of introducing some modification in the principles. Whether or not the position is stated in the policy. Certain common law principles automatically apply to fire insurance contrast.
UTMOST GOOD FAITH
The parties to the contract are required to observe good faith they should not be fraudulent. In insurance contracts the legal doctrine of utmost good faith applies. The duty of disclosure of material facts under common law ceases when the contract is concluded. If proposal form are used the n the declaration Claude therein will warrant the literal truth of the answers given in the form. Both the insured and insurer have to observe good faith when there is a loss. The law expects the insured to act as if he is uninsured. The insurers too are bound by good faith. They are bound to place a proper interpretation on the terms and conditions of the contract and settle the claim with fairness and equity.
The insurable interest must exist at the time of loss general speaking insurable interest must exist at the inception of the contract. Transfer of insurable interest does not automatically effect transfer of the policy to the transferee. The personal nature of the insurance contract is emphasized in condition of the fire policy. Insurable interest of a bank is recognized by the agreed bank clause which is prescribed by the tariff and is incorporated in all policies in which a bank has a partial interest and which policies are to be made out in the name of the bank and owner or mortgagor.
EXISTENCE OF THE SUBJECT MATTER
The third implies condition provides that the subject matter of insurance must exist when the contract is effected and must be described adequate to ensure that it can be identified in the event of loss. The description may relate to a particular object with a specific identification. If property insured cannot be indentified with reference to name municipal number etc.
THE PRINCIPLE OF INDEMNITY
The common law principles of utmost good faith and insurable interest have been discussed the third common law principle is that relating to indemnity with its corollaries subrogation and contribution. A fire insurance contract is a contract of indemnity that is to say it is contract to pay the actual loss sustained by the insured subject to the sum insured under the policy and other terms of the policy. If the loss suffered by the insured is recoverable from other source third parties and other insurers then the insured cannot recover from all sources.
THE DOCTRINE OF PROXIMATE CAUSE
The essence of the insurance contract is provision of indemnity for financial loss suffered by the insured as a result of the happening of an event insured against under the policy. When the loss arises the insured has to prove that the loss he has suffered is the loss provided for in the policy. Every event is the effect of a cause. The cause itself may be the effect of some other cause preceding it . there may be a succession of causes of events in the infinite past it concerns itself with identifying the dominant, effective and proximate cause to the exclusion of all other causes which are too remote. therefore in general it may he said if the loss is attributed to this insured peril at the direct and unavoidable result of that peril so that a direct causal relation able is established the insurers are liable for the loss.
The perils need not ne the immediately preceding cause of the damage but it must be established that loss is connected with the peril by a chain of events leading naturally and in the ordinary course of event from one to the other. The general rule may be stated as follows. A loss which is not occasioned by the direct action of fire upon the property insured is not a loss by fire within the meaning of the policy unless it is proximately caused by fire. In the former case the fire still continued to be an actively operating source of danger whereas in the latter case the fire had spent itself and itself and it required the intervention of a fresh event to produce the loss which but in the former case an inevitable which was absent from the other. again peril insured against would produce a prima facie damage when the actual instrument of destruction is the reasonable and probable consequence of the insured peril in the ordinary course of events. In both cases although the property does not suffer direct damage by fires yet the connection between the loss and the existence of fire is so direct and close that the fire must be regarded at the proximate cause of the loss.
The doctrine of proximate cause applies equally to exceptions. If the loss is proximately caused by an excepted peril. There is no liability under the policy. Thus where a bomb dropped by an enemy aircraft sets fire to a warehouse the loss though caused by fire. Similarly where premises are burdened by a fire which had spread through natural causes from a burning forest the fire in such premises is a forest fire with in the exception of the policy. Thus the condition is so framed as to exclude all the consequences of an excepted perils in which event the rule of proximate cause does not apply. When insurers rely upon an exception in the policy for repudiating liability the onus rests on them to prove that the exceptions applies however the above mentioned exclusion is no warder as to shift this onus to the insured who has to prove that the fire was not associated directly or indirectly with the excepted perils.