CONTRACT OF INDEMNITY
INSURANCE IS A CONTRACT OF INDEMNITY
The basic principle of a contract of insurance is that the indemnity recoverable from the insurer is the pecuniary loss suffered by the assured under that contract. Thus, s 1 of the Marine Insurance Act 1906,1 in defining marine insurance, confirms that the contract is, first and foremost, a contract of indemnity:
A contract of marine insurance is a contract whereby the insurer undertakes to indemnify the assured, in a manner and to the extent thereby agreed, against marine losses, that is to say, the losses incident to a marine adventure.
In order that the fundamental principle of indemnity is upheld, other concepts and rules have become established in insurance law; these include double insurance, the right to contribution, return of premium and subrogation, all of which are discussed in the course of this chapter.
The philosophy behind insurance and indemnification was summed up in the early case of Brotherston v Barber (1816) 5 M&S 418, where an insured ship was captured by an American privateer and then re-captured by a Royal Navy ship. Although the claimant, on hearing of the initial capture, claimed for a total loss, the court ruled that he could only be indemnified for a partial loss, as the ship had been re-captured.
Abbott J: [p 425] …But, the great principle of the law of insurance is that it is a contract for indemnity. The underwriter does not stipulate, under any circumstances, to become the purchaser of the subject matter insured; it is not supposed to be in his contemplation: he is to indemnify only. This being the principle, it seems to me that any practice or doctrine which is calculated to break in upon it ought to be narrowly watched.
Similarly, Brett LJ was moved to reiterate the fundamental concept of insurance in Castellain v Preston (1883) 11 QBD 380, CA, where a house was damaged by fire whilst it was in the process of being sold. The vendors not only received an indemnity from their insurers, but also, later, despite the fire, the full amount of the purchase money from the buyers. Not unreasonably, the underwriters sought from the vendors a return of the payment they had made to them on the basis that they, the vendors, had, in fact, suffered no pecuniary loss. In this, the insurers were successful.
Brett LJ: [p 386] …The very foundation, in my opinion, of every rule which has been applied to insurance law is this, namely, that the contract of insurance contained in a marine or fire policy is a contract of indemnity, and of indemnity only, and that this contract means that the assured, in case of a loss against which the policy has been made, shall be fully indemnified, but shall never be more than fully indemnified. That is the fundamental principle of insurance, and if ever a proposition is brought forward which is at variance with it, that is to say, which either will prevent the assured from obtaining a full indemnity, or which will give to the assured more than a full indemnity, that proposition must certainly be wrong.
And, in Richards v Forestal Land, Timber and Railways Co Ltd  3 All ER 62, HL, where goods aboard a German vessel were lost at the outset of the Second World War, when the ship was scuttled in order to avoid capture, Lord Wright had occasion to consider the purpose of a contract of insurance and the part the Act had to play in the construction of that contract.
Lord Wright: [p 76] …The Act is merely dealing with a particular branch of the law of contracts—namely, those of marine insurance. Subject to various imperative provisions or prohibitions and general rules of the common law, the parties are free to make their own contracts and to exclude or vary the statutory terms. The object both of the legislature and of the courts has been to give effect to the idea of indemnity, which is the basic principle of insurance, and to apply it to the diverse complications of fact and law in respect of which it has to operate. In this way, the law merchant has solved, or sought to solve, the manifold problems which have been presented by insurances of maritime adventures.
The indemnity is not necessarily perfect
Whilst the overriding principle of insurance is that of indemnification for losses sustained, the courts accept the fact that, because there must be an element of freedom for the parties to the insurance to contract on whatever terms they deem fit, in many instances, the indemnity is unlikely to be perfect. This is largely attributable to the fact that both the common law and s 27(3) of the Act endorse the fact that the value fixed by the policy is conclusive of the insurable value of the subject matter insured. This allows the parties the freedom to set the value of the subject matter insured at whatever figure they so wish. Provided that any over-valuation is not so excessive as to offend the cardinal principle of the duty to observe utmost good faith, the law of non-disclosure of a material fact, and of misrepresentation and the rule against wager, the courts are obliged to uphold the value fixed in the policy as conclusive. It is, of course, difficult at any given time to gauge the value of any subject matter with precision, but gross or exorbitant over-valuation could be construed as evidence of fraud.2 That the principle of indemnity is not perfect is illustrated in the case of Irving v Manning, below.
Irving v Manning (1847) 1 HLC 287
In a valued policy of insurance, the agreed value of a vessel, General Kyd, was put at £17,500. When General Kyd was severely damaged by storms, she was deemed a constructive total loss, because it was estimated that the cost of repairs would have amounted to £10,500, whilst her marketable value, on being repaired, was only £9,000.3 Thus, the assured was indemnified to the value of £17,500, when the true value of the ship was only £9,000.
Patteson J: [p 307] …A policy of assurance is not a perfect contract of indemnity. It must be taken with this qualification, that the parties may agree beforehand in estimating the value of the subject assured, by way of liquidated damages, as indeed they may in any other contract to indemnify.
In Goole and Hull Steam Towing Co Ltd v Ocean Marine Insurance Co  29 LlL Rep 242, McKinnon J noted that: [p 244] ‘…the real question in the case is: what is the measure of indemnity that, by the convention of the bargain, has been promised to the assured? That may in some cases be less than an ideal pecuniary indemnity, in some cases it may be more.’4
However, although it is conceded that a contract of indemnity is not always perfect, the principle of indemnification for actual pecuniary loss remains in the forefront of the minds of judges. This was confirmed by Lord Sumner, in British and Foreign Insurance Co Ltd v Wilson Shipping Co Ltd  1 AC 188, HL, who observed that: [p 214] ‘…In practice, contracts of insurance by no means always result in a complete indemnity, but indemnity is always the basis of the contract.’
GAMING AND WAGERING CONTRACTS
The Act, in s 4(1), states that:
Every contract of marine insurance by way of gaming or wagering is void.
Although the Act, in itself, does not specify that the effecting of a gaming or wagering contract of insurance is illegal, only that it is void, attention is also drawn to the Marine Insurance (Gambling Policies) Act 1909,5 which is also relevant. The 1909 Act affirms that:
(a) any person effects a contract of marine insurance without having any bona fide interest, direct or indirect, either in the safe arrival of the ship in relation to which the contract is made, or in the safety or preservation of the subject matter insured, or a bona fide expectation of acquiring such an interest; or
(b) any person in the employment of the owner of a ship, not being a part owner of the ship, effects a contract of marine insurance in relation to the ship, and the contract is made ‘interest or no interest’, or ‘without further proof of interest than the policy itself’, or ‘without benefit of salvage to the insurer’, or subject to any other like term,
the contract shall be deemed to be a contract by way of gambling on loss by maritime perils, and the person effecting it shall be guilty of an offence…
Thus, despite the Marine Insurance Act 1906 stating, in s 4(1), that a gaming or wagering contract of insurance is merely void, under the Marine Insurance (Gambling Policies) Act 1909 it is also a criminal offence to effect insurance when the assured has no insurable interest in the adventure.
There are, essentially, two forms of gaming and wagering contracts contemplated by s 4(2) of the 1906 Act, namely:
(a) policies where the assured has no insurable interest or expectation of acquiring such an interest; and
(b) ‘honour’ or ‘ppi’ (policy proof of interest) policies.
Assured has no insurable interest or expectation of acquiring such an interest
Section 4(2)(a) of the Act states that:
A contract of marine insurance is deemed to be a gaming or wagering contract:
(a) where the assured has not an insurable interest as defined by this Act, and the contract is entered into with no expectation of acquiring such an interest…
In defining ‘insurable interest,’ s 5(2) stipulates that a person having an insurable interest would be one who ‘…may benefit by the safety or due arrival of insurable property, or may be prejudiced by its loss, or by damage thereto, or by the detention thereof, or may incur liability in respect thereof’.
Notably, that insurable interest is only relevant ‘…at the time of the loss, though he need not be interested when the insurance is effected…’.6
The premium, with respect to a policy which is void, is, under s 84(3)(a) of the Act, only returnable if ‘…there has been no fraud or illegality on the part of the assured…’7
‘Honour’ or ‘ppi’ policies
A ‘ppi’ policy (policy proof of interest), often referred to as an ‘honour’8 policy, is also deemed to be a gaming or wagering contract by the Act when it confirms, in s 4(2)(b), that:
A contract of marine insurance is deemed to be a gaming or wagering contract:
(b) where the policy is made ‘interest or no interest’, or ‘without further proof of interest than the policy itself’, or ‘without benefit of salvage to the insurer’, or subject to any other like term,
provided that, where there is no possibility of salvage, a policy may be effected without benefit of salvage to the insurer.
It is emphasised that this sub-section is aimed directly at the wording contained within a contract of insurance. It is immaterial, when such words as ‘interest or no interest’, ‘without further proof of interest than the policy itself’, ‘without benefit of salvage to the insurer’, or any other like term, are used, whether the assured has or has not an insurable interest in the subject matter insured. Just the use of the words themselves, or any other like term, is sufficient to render the contract void. This was particularly well illustrated in the case of Cheshire and Co v Vaughan Brothers and Co, below.
Thomas Cheshire and Co v Vaughan Brothers and Co  3 KB 240, CA
The plaintiffs were the owners of warehouses at Liverpool, Birkenhead and Newport, where they were in the habit of storing nitrate of soda. At the time, the First World War was in progress, and the British Government controlled all shipments of nitrate from South America. When the plaintiffs anticipated a shipment of nitrate from South America, they reserved space in their warehouses and instructed their brokers to effect a policy of insurance (ppi) with the defendants on anticipated profits; the policy to cover marine and war risks, and the risk of the cargo of nitrate being diverted to another port by the Government. At the time the policy was effected, the insurers were not made aware of the real risk of the shipment being diverted by the Government. So, when the shipment of nitrate was diverted by the Government and the plaintiffs claimed on their policy, the insurers refused payment on the basis that the policy had attached to it a slip which stated that the policy was made ‘without further proof of interest than the policy itself’, thereby making the contract void by s 4(2)(b) of the Marine Insurance Act 1906.
The Court of Appeal upheld the decision of the trial judge, and ruled that the policy amounted to a ppi policy and was, therefore, void.
Bankes LJ: [p 248] …The second point [raised by counsel for the plaintiffs] is that this policy is not within s 4(2)(b). The section speaks of contracts of marine insurance being deemed to be gaming or wagering contracts where the policy is made ‘interest or no interest’, etc. The contention is that, as the plaintiffs had an insurable interest, the section does not apply. It seems to me that the language of the section does not permit of that construction. The section is drawn for the purpose, as it seems to me, of excluding any inquiry into the question whether or not an insurable interest exists. Sub-section 2(b) is directed to the form of the instrument and, if it is directed to the form, it must include everything which forms part of the instrument, whether it is pasted on or pinned on. In my opinion, when the section says that a contract of marine insurance is to be deemed a gaming or wagering contract where the policy is made ‘interest or no interest’, or subject to any other like term, it makes void a contract where the instrument contains one of those objectionable clauses.
Scrutton LJ: [p 254] …The argument, if I understand it rightly, is that subs 2 means that the contract is prima facie deemed to be a gaming and wagering contract, but that inference may be rebutted by showing that the assured had either an insurable interest or an expectation of acquiring one. That is, in effect, to read cl (a) of sub-s 2 into cl (b). I see no ground for cutting down the section in that way. It seems to me Parliament has said that, if this clause is in the policy, it is to be deemed to be a gaming and wagering policy, because it is a gaming and wagering clause.
Nor is it of any consequence whether a ppi clause, once attached to the policy, has since been detached, as was shown in Re London County Commercial Reinsurance Office Ltd, below.
Re London County Commercial Reinsurance Office Ltd  2 Ch 67
A reinsurance company was being wound up and a committee of creditors was appointed. The liquidator, whilst investigating claims against the company, noted that there were outstanding claims made under ppi policies amounting to £97,538; these included some marine policies. The issue before the court was whether the policies, which included ppi slips, were valid under the Act; in particular, those policies where the ppi slips had become detached.
The court ruled that the policies were void. The fact that the ppi slips had become detached was immaterial; the real issue was whether they were part of the policy when the contract was entered into.
Lawrence J: [p 81] …In my judgment, there is no difference between the policies which still have the ppi clause attached to them and those from which the ppi clause has been detached. It is not necessary to consider what course the court would have adopted if, before the policies had been brought to its attention, the ppi clause had been detached, and neither of the litigating parties had raised the point that such a clause had ever formed part of the policies, because, in the present case, evidence has been adduced on behalf of the liquidator which proves clearly that the ppi clause was attached to all the policies when they were signed and handed to the assured. In my judgment, the proper time to judge whether these policies are valid or void is at the time when they are issued. The subsequent tearing off of the ppi clause by the assured (even though it was done with the permission of the insurers) cannot, in my opinion, have the effect of rendering the policies valid if they were null and void when they were issued.
However, it is emphasised that, under the 1906 Act, ppi policies are not, in themselves, illegal; they are simply void. Thus, under s 84(1), provided that there has been ‘…no fraud or illegality on the part of the assured or his agents, the premium is thereupon returnable to the assured’.9 This was confirmed by Lawrence J, in Re London County Commercial Reinsurance Office Ltd  2 Ch 67, cited above.
Lawrence J: [p 85] …There remains to be considered the question whether the claimants under these policies are entitled to the return of the premiums which they have paid. Having regard to the fact that the Act 19 Geo 2, c 37, which rendered marine policies effected by way of gaming or wagering illegal, was repealed by s 92 of the Act of 1906, and that the latter Act merely renders such policies void, I am of opinion that the claimants are entitled to prove for the amount of the premiums paid by them in respect of these policies. It is admitted that the original assured, and therefore the reassured, had an insurable interest in the subject matter and that there was no fraud or illegality on the part of the assured or reassured or their agents. In these circumstances, I am of opinion that, as the consideration for the payment of the premiums has totally failed, s 84(1) of the Act of 1906 applies and the premiums are returnable by the company. In my judgment, therefore, the liquidator ought to admit the claimants under these policies as creditors in respect of the premiums paid by them.
Perhaps the philosophy behind ppi policies and the problems which arise under such policies were best illustrated by Scrutton LJ, in Thomas Cheshire and Co v Vaughan Brothers and Co  3 KB 240, CA, cited above.
Scrutton LJ: [p 252] …For many years, there has been an unfortunate conflict between the statute law and the practice of businessmen. It has been extremely common to place in policies a ppi clause providing that there shall be no necessity to prove the amount of loss, although all the time there was a statute which said that such a clause was either illegal or null and void. It is unfortunate that that practice has prevailed, because while, on the one hand, there are undoubtedly cases where there is a real loss, but it is difficult to prove its exact amount, and it is convenient in a business sense to have it assessed beforehand, on the other hand, there is no doubt that cases of deliberate attempts to get insurance money where there is no insurable interest, and cases of over-valuation on the chance of a loss, are rendered possible by the continued insertion of a ppi clause. Apart from the fact that the clause facilitates fraud, as it does in many cases, a practice has arisen with regard to it which places judges in great difficulty. It is the duty of judges, if they know that a policy has that clause on it, to treat it as null and void under the Act, and a practice has grown up of deceiving the court by parties tearing off the clause which they have put on the policy in the hope that the court will not know that there is such a clause and will give effect to the policy…that is the practice, and the only thing to be said to businessmen who carry on business in that way is that, if they persistently enter into contracts which are null and void under a statute, they must not complain if the courts obey the statute rather than their commercial practice.
Without benefit of salvage to the insurer
‘Without benefit of salvage’ is a term used in marine insurance law to signify that there is nothing capable of being abandoned to the insurer. That is, the assured has no property in the adventure which could be salvaged for the benefit of the insurer. This could be interpreted as the assured having no insurable interest in the adventure, therefore rendering the policy a gaming or wagering policy.
However, the Act recognises the fact that it is possible for an assured to have a type of insurable interest in the adventure which could not be abandoned to an insurer. Such would be the case when ‘commissions’ or ‘anticipated profits’ on a voyage are insured and the Act makes provision for such insurable risks by stating, at the end of s 4, that ‘…where there is no possibility of salvage, a policy may be effected without benefit of salvage to the insurer’.
DOUBLE INSURANCE, RIGHT TO CONTRIBUTION AND RETURN OF PREMIUM
The basis of insurance is that of indemnification for pecuniary losses incurred: this would preclude profit making by an assured through over-insurance by double insurance.10 Equally, on the same principle, when there is over-insurance by double insurance, each insurer must bear his share of any loss by way of a ‘contribution’ proportionate to the amount for which he is liable under the contract.11 And, should any insurer pay more than his proportion of the loss, he is entitled to recover from the other insurers their proportion of the loss by way of the right to contribution.12
With respect to any return of premium, the Act, in ss 82–84, enumerates the conditions under which the return of any premium or proportion of that premium is applicable, including a specific provision for over-insurance by double insurance. Under this provision, in keeping with the principle of indemnity, an insurer may be liable to return to the assured a proportion of the full premium because, on account of the double insurance, the risk insured amounts to less than that for which that full premium was paid.13
Double insurance and the right to contribution
Over-insurance by double insurance and the right to contribution are so interdependent that they are inseparable. With respect to over-insurance by double insurance, s 32(1) of the Act states:
Where two or more policies are effected by or on behalf of the assured on the same adventure and interest or any part thereof, and the sums insured exceed the indemnity allowed by this Act, the assured is said to be over-insured by double insurance.
And, with regard to any right to contribution arising out of over-insurance by double insurance, s 80 of the Act affirms that:
(1) Where the assured is over-insured by double insurance, each insurer is bound, as between himself and the other insurers, to contribute rateably to the loss in proportion to the amount for which he is liable under his contract.
(2) If any insurer pays more than his proportion of the loss, he is entitled to maintain an action for contribution against the other insurers, and is entitled to the like remedies as a surety who has paid more than his proportion of the debt.
However, it is emphasised that, as the Act states in s 32(1), over-insurance by double insurance and any contributions resulting from such, are only applicable to two or more policies of insurance which are effected on the same subject matter by or on behalf of the same person. It does not apply when different persons insure the same subject matter in respect of different rights. Mellish LJ was careful to point this out in North British and Mercantile Insurance Co v London, Liverpool and Globe Insurance Co, below.
North British and Mercantile Insurance Co v London, Liverpool, and Globe Insurance Co (1877) 5 Ch D 569, CA
A quantity of grain, owned by Rodocanachi and Co, was stored in the warehouse of another company, Barnett and Co. The grain was insured by both companies with different underwriters. When a fire broke out and destroyed the grain, Barnett and Co, the warehouse owners, were indemnified in full by the plaintiffs, North British and Mercantile Insurance Co who, in turn, claimed that the defendants, the insurers of Rodocanachi and Co, were liable for a contribution to the claim which had already been settled in full.
The Court of Appeal, in affirming the decision of the lower court, ruled that the defendants, the insurers of Rodocanachi and Co, were not liable to contribute towards the indemnity already settled by the plaintiffs, North British Insurance Co. This was because, although the subject matter of insurance was the same with respect to both underwriters, the assured under the respective policies were different. Mellish LJ distinguished the right to contribution from the right of subrogation.
Mellish LJ: [p 583] …Now I do not know of any English cases on the subject of contribution as applied to fire policies; but I can see no reason why the principle in respect of contribution should not be exactly the same in respect of fire policies as they are in respect of marine policies, and I think if the same person in respect of the same right insures in two offices, there is no reason why they should not contribute in equal proportions in respect of a fire policy as they would in the case of a marine policy. The rule is perfectly established in the case of a marine policy that contribution only applies where it is an insurance by the same person having the same rights, and does not apply where different persons insure in respect of different rights. The reason for that is obvious enough. Where different persons insure the same property in respect of their different rights they may be divided into two classes. It may be that the interest of the two between them makes up the whole property.
…But then there may be cases where, although two different persons insured in respect of different rights, each of them can recover the whole, as in the case of a mortgagor and a mortgagee. But wherever that is the case, it will necessarily follow that one of these two has a remedy over against the other, because the same property cannot in value belong at the same time to two different persons…I think whenever that is the case, the company which has insured the person who has the remedy over succeeds to his right of remedy over, and then it is a case of subrogation.
In 1992 and 1993, two significant insurance cases concerning the right to contribution, neither of them marine insurance cases, but nonetheless relevant, came before the Court of Appeal and the Judicial Committee of the Privy Council respectively. Effectively, the issue before the courts in both instances was whether a co-insurer could, by a provision within the contract of insurance, exclude his liability to contribute to a loss.
That the right to contribution is founded in equity rather than contract is well established, and it was accepted, in the case of Legal and General Assurance Society Ltd v Drake Insurance Co Ltd, below, that the equitable right to contribution could be varied or excluded by contract, even between the assured and the insurer. However, in the case in question, Lloyd LJ was of the opinion that the clause on notification of claim14 was not one which could modify or exclude the equitable right to contribution.
Legal and General Assurance Society Ltd v Drake Insurance Co Ltd  1 All ER 283, CA
Two insurance companies insured the same driver under standard private car policies. Both policies provided that immediate written notice had to be given of an event which might give rise to a claim, observance of which was a condition precedent to liability, and that if there was ‘any other insurance covering the same loss’ when the claim arose, the insurers would not pay or contribute more than their rateable proportion. When the insured driver injured a pedestrian, the plaintiffs (Legal and General) settled the claim without knowing that the assured had taken up another policy of insurance. When the plaintiffs learned about the other policy, they sought a 50% contribution from the other insurer, the defendants (Drake Insurance). However, Drake Insurance refused to contribute, on the basis that they had a good defence to any claim under their policy, as the driver had been in breach of a condition precedent in not having given notice of claim within the stipulated period.
The Court of Appeal (Ralph Gibson LJ dissenting) ruled that the right to contribution was not defeated by the failure of the assured to notify the co-insurer of a potential claim, albeit such failure constituted a breach of a condition under the policy. The plaintiffs were held to have had an undoubted right to contribution in equity against the defendant for half the amount for which the claim was settled. It was held that the right to contribution accrued on the date of loss; and as the breach of the condition precedent must necessarily occur after the date of loss—by which time the right to contribution had already accrued—the plaintiff was entitled to a 50% contribution from the defendant.
Lloyd LJ: [p 287] …It may be said that the distinction between breach of condition prior to the loss and breach of condition subsequent to the loss is a narrow one. So it may be. But the difference is crucial. For it is at the date of the loss that the co-insurer’s right to contribution, if any, accrues. [Emphasis added.]
It is often said that, though the right to contribution is founded in equity, yet it may be varied or excluded by contract. As long ago as 1641, in Swain v Wall Rep Ch 149, 21 ER 534, it was held that the right of contribution could be modified by contract between the co-obligers. But it can also be modified or excluded by contract between the assured and the insurer, in this sense, that the policy may limit the amount of the insurer’s liability, or may provide, typically, that the insurer should not be liable beyond his rateable proportion of the loss. But, a provision requiring the assured to give notice of claim does not, in my opinion, modify or exclude the equitable right to contribution in the same sense.
Nourse LJ: [p 291] …There being no contract between the two insurers, the right of contribution depends, and can only depend, on an equity which requires someone who has taken the benefit of a premium to share the burden of meeting the claim.
Why should that equity be displaced simply because the assured has failed to give the notice which is necessary to make the other insurer liable to him? At the moment of the accident, either insurer could have been made liable for the whole of the loss. Why should he who accepts sole liability for settling the claim be deprived of his right to contribution, by an omission on the part of the assured over which he has no control? As between the two insurers the basis of the equity is unimpaired. He who has received a benefit ought to bear his due proportion of the burden.
While accepting that a line must be drawn somewhere, I am of the opinion that a denial of the right to contribution in circumstances such as these would be unduly restrictive and indeed inequitable. An attempt to state, in general terms, where the line ought to be drawn is neither necessary nor desirable. For present purposes it is enough to say that it ought not to be drawn so as to exclude the right to contribution in a case where, at the moment of the accident, each insurer is potentially liable for the whole of the loss.
The issue of contribution arose again in Eagle Star Insurance Co v Provincial Insurance plc, below, where the Privy Council expressed its disagreement with the stand and reasoning taken in the Legal and General case that, for the purposes of contribution between co-insurers, there was a special cut-off point, viz, at the time of loss, at which the position is to be judged.
Eagle Star Insurance Co v Provincial Insurance plc  2 Lloyd’s Rep 143, PC
A Mr Simms, who suffered injuries as a result of a road accident, brought proceedings and obtained judgment against the negligent driver, a Mr O’Reilly. But, as Mr O’Reilly failed to meet the judgment, he brought proceedings against Mr O’Reilly’s insurer, Eagle Star, and the repairer’s insurer, Provincial, under the Road Traffic Act, which provided, inter alia, that an insurer was bound to meet an injured person’s claim when the driver responsible failed to do so. The policies issued by Eagle Star and by Provincial both contained a condition under which the company was not liable to contribute more than its rateable proportion of any loss, damage or expense.
The accident was never reported to Provincial, and under the terms of their policy, they were entitled to repudiate liability.15 Eagle Star contended that they were entitled to be indemnified by Provincial, because they were not at risk, having cancelled their policy before the accident.16 Provincial claimed that it was entitled to a 50% contribution from Eagle Star. Thus, the present action was concerned with the right to contribution between the two insurance companies, both of which were under a statutory liability to meet the injured person’s claim when the driver responsible failed to do so.
The Privy Council ruled that both insurance companies had to contribute equally to the loss, because they were both statutorily liable to a third party claim.
Lord Woolf: [p 147] … [referring initially to the Legal and General case] On an appeal from the decision at first instance that Legal and General were entitled to 50% contribution, the Court of Appeal (by a majority of Lloyd and Nourse LJJ, Ralph Gibson LJ dissenting) held that where an assured had effected insurance with two different insurers to cover the same loss, the right of one insurer to contribution from a second insurer as to the costs of meeting a claim accrued at the time of the loss. Therefore, even if Drake Insurance Co were entitled to establish that their cover had lapsed because of late notification, the cover would not have lapsed until after the loss, and accordingly, the right of Legal and General to contribute was not affected. [p 148] …Lloyd LJ acknowledges that:
…it is often said that, though the right to contribution is founded in equity, yet it may be varied or excluded by contract.
Lloyd LJ then accepted that, for the purpose of contribution, the assured and the insurer by contract can limit the amount of the insurer’s liability or provide that the insurer should not be liable beyond his rateable proportion. However, Lloyd LJ distinguishes a provision requiring the assured to give notice of claim because it does not:
…modify or exclude the equitable right to contribution in the same sense.
Approaching the issue as a matter of principle, in a case such as the present, where both insurers are required to indemnify a third party by statute, there can only from a practical point of view be two solutions to the question of contribution: either the insurers should contribute in accordance with their respective statutory liabilities so that, if they are statutorily equally liable, they will so share the loss; or contribution is determined in accordance with the extent of their respective liabilities to the person insured under the separate contracts of insurance. Of the two alternatives, the contractual approach is the more appropriate, since the extent of their respective liabilities to the person insured will indicate the scale of the double insurance.
If the contractual approach is adopted, then there can be no justification for departing from the contractual position by creating, for the purposes of contribution between the co-insurers, a special cut-off point which requires the position to be judged at the date of the loss. Having such a cut-off point could produce results which do not reflect the contractual situation so far as liability to the insured is concerned. Looking at the issue from the insurer’s and insured’s standpoint, it makes no difference if an insurer defeats a claim by relying on action taken before or after the loss has occurred. If both insurers are liable at least in part to the person insured, then they should contribute to their statutory liability in accordance with their respective liability to the person insured for the loss. While this could have the result that the action of a person insured in relation to one insurer can affect the rights of contribution of the other insurer, this is an inevitable consequence of one insurer being able to take advantage of any limitation of his contractual liabilities on the question of contribution. However, before suggesting this could be unfair, it has to be remembered that it is unlikely that the existence of the other insurer would have been known at the time that the contract of insurance was made.
[p 149] …Halsbury accurately states [the condition which] must be satisfied before a right of contribution can arise. The condition is that: